Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 001-16767
Westfield Financial, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 73-1627673
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
141 Elm Street, Westfield, Massachusetts 01085
(Address of Principal Executive Offices, including zip code)
(413) 568-1911
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.01
par value per share
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No .
--- ---
Indicate by check mark if disclosure of delinquent files pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of March 19, 2002, the registrant had 10,580,000 shares of common stock,
$.01 par value, issued and outstanding. Of such shares outstanding, 5,607,400
shares were held by Westfield Mutual Holding Company, the registrant's mutual
holding company, and 4,972,600 were held by the public and directors,
officers and employees of the registrant. The aggregate market value of the
voting stock held by non-affiliates of the registrant as of March 19, 2002,
was $68,757,574. This figure was based on the closing price as of March 19,
2002 on The American Stock Exchange for a share of the registrant's common
stock, which was $14.70 on March 19, 2002.
DOCUMENTS INCORPORATED BY REFERENCE: None.
WESTFIELD FINANCIAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2001
TABLE OF CONTENTS
ITEM PART I PAGE
1 BUSINESS 2
2 PROPERTIES 35
3 LEGAL PROCEEDINGS 35
PART II
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 36
5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 36
6 SELECTED FINANCIAL DATA 37
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 38
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 52
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 53
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 53
PART III
10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 53
11 EXECUTIVE COMPENSATION 56
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 63
13 CERTAIN RELATIONSHIPS AND RELATED TRANSCTIONS 65
PART IV
14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 65
i
FORWARD - LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements"
which may be identified by the use of such words as "believe," "expect,"
"anticipate," "should," "planned," "estimated," and "potential." Examples of
forward-looking statements include, but are not limited to, estimates with
respect to our financial condition and results of operation and business that
are subject to various factors which could cause actual results to differ
materially from these estimates. These factors include, but are not limited
to:
* general and local economic conditions;
* changes in interest rates, deposit flows, demand for mortgages
and other loans, real estate values, and competition;
* changes in accounting principles, policies, or guidelines;
* changes in legislation or regulation; and
* other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing,
products, and services.
Any or all of our forward-looking statements in this Annual Report on
Form 10-K and in any other public statements we make may turn out to be
wrong. They can be affected by inaccurate assumptions we might make or known
or unknown risks and uncertainties. Consequently, no forward-looking
statements can be guaranteed.
1
PART I
ITEM 1. BUSINESS
General. Westfield Financial, Inc. ("Westfield Financial," "us," "our,"
or "we") is a Massachusetts-chartered stock holding company organized in
November 2001 in connection with the reorganization of Westfield Mutual
Holding Company, a Massachusetts chartered mutual holding company which owns
53% of the outstanding common stock of Westfield Financial. Westfield
Financial serves as the bank holding company for Westfield Bank, a
Massachusetts chartered stock savings bank. Unless the context otherwise
requires, all references herein to Westfield Bank or Westfield Financial
include Westfield Financial and Westfield Bank on a consolidated basis.
Westfield Financial sold 4,972,600 shares of its common stock to eligible
depositors of Westfield Bank. Net proceeds of the stock offering were $47.7
million. The reorganization of Westfield Mutual Holding Company and the
related stock offering by Westfield Financial were completed on December 27,
2001. The common stock of Westfield Financial commenced trading on The
American Stock Exchange under the symbol "WFD" on December 28, 2001.
Westfield Securities Corp., a Massachusetts chartered security
corporation, and Westfield Bank are the only operating subsidiaries of
Westfield Financial. Westfield Securities Corp. was formed in December 2001
by Westfield Financial for the primary purpose of holding qualified
investment securities.
Westfield Bank was formed in 1853 and reorganized into a mutual holding
company structure without a stock offering in 1995. Historically, Westfield
Bank has been a community-oriented provider of banking products and services
to businesses and individuals, including traditional products such as
residential and commercial real estate loans, consumer loans and a variety of
deposit products. In recent years, however, Westfield Bank has developed and
implemented a lending strategy that focuses less on residential real estate
lending and more on servicing commercial customers, including increased
emphasis on commercial and industrial and consumer lending and deposit
relationships, extending its branch network and broadening its product lines
and services.
In addition, beginning on September 1, 2001, Westfield Bank began
referring its residential real estate loan customers to a third party
mortgage company. Under the program, substantially all of Westfield Bank's
residential real estate loans are underwritten and originated by a third
party mortgage company. In connection with this referral program, Westfield
Bank receives fee income for each of the loans originated by the third party
mortgage company. Westfield Bank may purchase residential real estate loans
from the third party mortgage company depending on market conditions.
Westfield Bank believes that this business strategy is best for its
long term success and viability, and complements its existing commitment to
high quality customer service. Westfield Bank operates through 10 banking
offices in Agawam, East Longmeadow, Holyoke, Southwick, Springfield, West
Springfield and Westfield, Massachusetts. It also has two free-standing ATM
locations in Agawam and Feeding Hills, Massachusetts. Westfield Bank's
primary deposit gathering area is concentrated in the communities surrounding
these locations and its primary lending area includes all of Hampden County
in western Massachusetts. In addition, Westfield Bank provides online banking
services through its web site (http://www.westfieldbank.com).
2
Westfield Bank's revenues are derived principally from interest on its
loans and interest and dividends on its investment securities. Its primary
sources of funds are deposits, scheduled amortization and prepayments of loan
principal and mortgage-backed securities, maturities and calls of investment
securities, and funds provided by operations.
Market Area. Westfield Bank conducts its operations out of the Bank's
main office in Westfield, Massachusetts. It also operates through nine other
banking offices located in Westfield and in the communities of Agawam, East
Longmeadow, Holyoke, Southwick, Springfield and West Springfield,
Massachusetts. Its deposits are gathered from the general public in these
towns and surrounding communities, and its lending activities are
concentrated primarily in Hampden County, Massachusetts.
The City of Westfield is largely suburban and is located in the Pioneer
Valley near the intersection of U.S. Interstates 90 (the Massachusetts
Turnpike) and 91. Interstate 90 is the major east-west highway that crosses
Massachusetts. Interstate 91 is the major north-south highway that runs
directly through the heart of New England. Westfield is located approximately
90 miles west of Boston, Massachusetts, 70 miles southeast of Albany, New
York and 30 miles north of Hartford, Connecticut. Westfield's 2001 population
was approximately 40,100 and the estimated 2001 population for Hampden County
was approximately 456,300.
The economy of Westfield Bank's market area historically has been
supported by a variety of industries. Its primary market area has benefited
from the presence of large employers centered in insurance, health care,
warehouse, manufacturing and education. Among the largest employers currently
in its market area are American Saw, Bay State Health Systems, Big Y Foods,
Friendly Ice Cream Corporation, Hasbro, Mass Mutual Life Insurance Company,
Mestek, Noble Hospital, C&S Wholesale, the University of Massachusetts,
Westfield State College and the Sullivan Paper Company. In addition, other
employment and economic activity is provided by substantial number of small
and medium size businesses in the area.
During the late 1990's, the regional economy in our primary market
area, based on economic indicators, such as unemployment rates, vacancy rates
and household income trends, has strengthened, and residential and commercial
real estate values in some areas approach the market values existing before
the economic downturn in the late 1980s. As of December 2001, the
unemployment rate of Westfield Bank's primary market area and Massachusetts
was 3.6% and 3.7%, respectively, compared to 3.1% and 2.4%, respectively, in
December 2000 and to the national average of 4.8%. From July 2000 to July
2001, the median household income in Westfield Bank's market area increased
by 8.0% to $52,245 compared to $48,338 as of June 2000. Despite the increase,
the median household income in Westfield Bank's market area is below state
and national averages.
In recent years, however, the regional economy in Westfield Bank's
primary market area has showed signs of weakening. Unemployment rates in
Westfield Bank's market area have recently increased and Westfield Bank
expects that unemployment rates may increase further as the regional and
national economy weakens. Westfield Bank's future growth opportunities will
be influenced by the growth and stability of the statewide and regional
economies, other demographic population trends and the competitive
environment. Westfield Bank believes that it has developed lending products
and marketing strategies to address the diverse credit-related needs of the
residents in its market area.
3
Competition. Westfield Bank faces intense competition both in making
loans and attracting deposits. Its primary market area is highly competitive
and it faces direct competition from 24 financial institutions, many with a
local, state-wide or regional presence and, in some cases, a national
presence. Many of these financial institutions are significantly larger than
and have greater financial resources than Westfield Bank. Westfield Bank's
competition for loans comes principally from commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies,
mutual funds, insurance companies and brokerage and investment banking firms.
Westfield Bank's most direct competition for deposits has historically come
from commercial banks, savings banks, co-operative banks and credit unions.
Westfield Bank faces additional competition for deposits from short-term
money market funds and other corporate and government securities funds and
from brokerage firms and insurance companies. Historically, Westfield Bank's
most direct competition for deposits has come from savings, co-operative and
commercial banks. In Westfield Bank's market area, there were approximately
nine of the foregoing institutions at December 31, 2001.
Lending Activities
Loan Portfolio Composition. Westfield Bank's loan portfolio primarily
consists of residential real estate loans, home equity loans, commercial real
estate loans, commercial and industrial loans and consumer loans.
At December 31, 2001, Westfield Bank had total loans of $417.3 million,
of which $212.8 million were residential mortgage loans and home equity
loans. Of this total, 34.6% were adjustable-rate loans and 65.4% were fixed-
rate loans. The remainder of its loans at December 31, 2001 consisted of
commercial real estate loans, commercial and industrial loans, and consumer
loans. Commercial real estate loans outstanding at December 31, 2001 totaled
$99.4 million, or 23.82% of total loans. Commercial and industrial loans
outstanding at December 31, 2001 totaled $47.0 million, or 11.27% of total
loans. Consumer loans outstanding on December 31, 2001 totaled $58.1 million,
or 13.92% of total loans.
Westfield Bank's loans are subject to federal and state law and
regulations. The interest rates Westfield Bank charges on loans are affected
principally by the demand for loans, the supply of money available for
lending purposes and the interest rates offered by its competitors. These
factors are, in turn, affected by general and local economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, legislative tax policies and governmental budgetary matters.
4
The following table presents the composition of Westfield Bank's loan
portfolio in dollar amounts and in percentages of the total portfolio at the
dates indicated.
At December 31,
---------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------- ------------------- ------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Real estate loans:
Residential $199,710 47.86% $250,945 53.64% $250,625 53.29% $239,972 57.47% $219,841 56.72%
Home equity 13,041 3.13 13,217 2.83 14,258 3.03 14,858 3.56 19,110 4.93
Commercial 99,425 23.82 92,826 19.84 89,333 18.99 90,026 21.56 96,151 24.81
------------------------------------------------------------------------------------------------
Total real estate loans 312,176 74.81 356,988 76.31 354,216 75.31 344,856 82.59 335,102 86.46
------------------------------------------------------------------------------------------------
Other loans:
Commercial and industrial 47,012 11.27 37,510 8.02 32,673 6.95 25,353 6.07 21,396 5.52
Indirect auto 52,129 12.49 66,168 14.14 76,006 16.16 38,799 9.30 21,937 5.66
Consumer, other 5,955 1.43 7,171 1.53 7,436 1.58 8,524 2.04 9,144 2.36
------------------------------------------------------------------------------------------------
Total other loans 105,096 25.19 110,849 23.69 116,115 24.69 72,676 17.41 52,477 13.54
------------------------------------------------------------------------------------------------
Total loans 417,272 100.00% 467,837 100.00% 470,331 100.00% 417,532 100.00% 387,579 100.00%
Less:
Net deferred loan
origination costs 197 128 231 184 348
Allowance for loan losses (3,923) (3,434) (3,118) (2,632) (2,791)
-------- -------- -------- -------- --------
Total loans, net $413,546 $464,531 $467,444 $415,084 $385,136
======== ======== ======== ======== ========
5
Loan Maturity and Repricing. The following table shows the repricing
dates or contractual maturity dates as of December 31, 2001. The table does
not reflect prepayments or scheduled principal amortization. Demand loans,
loans having no stated maturity, and overdrafts are shown as due in within
one year.
At December 31, 2001
-----------------------------------------------------------------------------------
Residential Commercial Commercial
Real Estate Home Equity Real Estate and Industrial Consumer
Loans Loans Loans Loans Loans Totals
----------- ----------- ----------- -------------- -------- ------
(In thousands)
<s> <c> <c> <c> <c> <c> <c>
Amounts due:
Within one year $ 23,399 $13,041 $25,647 $25,747 $ 1,536 $ 89,370
----------------------------------------------------------------------------------
After one year:
One to three years 19,398 - 23,108 7,002 24,075 73,583
Three to five years 22,849 - 12,447 10,755 28,528 74,579
Five to ten years 40,321 - 27,149 2,396 3,525 73,391
Ten to twenty years 43,128 - 4,045 686 - 47,859
Over twenty years 50,615 - 7,029 426 420 58,490
----------------------------------------------------------------------------------
Total due after one year 176,311 - 73,778 21,265 56,548 327,902
----------------------------------------------------------------------------------
Total amount due: 199,710 13,041 99,425 47,012 58,084 417,272
----------------------------------------------------------------------------------
Less:
Net deferred loan origination
costs (205) 180 - - 222 197
Allowance for loan losses (787) (52) (1,467) (999) (618) (3,923)
----------------------------------------------------------------------------------
Loans, net $198,718 $13,169 $97,958 $46,013 $57,688 $413,546
==================================================================================
The following table presents, as of December 31, 2001, the dollar
amount of all loans contractually due or scheduled to reprice after December
31, 2002 and whether such loans have fixed interest rates or adjustable
interest rates.
Due After December 31, 2002
------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
<s> <c> <c> <c>
Real Estate Loans
Residential $138,916 $ 37,395 $176,311
Commercial 14,144 59,634 73,778
------------------------------------
Total real estate loans 153,060 97,029 250,089
Other Loans
Commercial and industrial 18,309 2,956 21,265
Consumer 56,530 18 56,548
------------------------------------
Total other loans 74,839 2,974 77,813
------------------------------------
Total loans $227,899 $100,003 $327,902
====================================
6
The following table presents our loan originations, purchases, sales
and principal payments for the periods indicated.
For the Year Ended December 31,
----------------------------------
2001 2000 1999
---- ---- ----
(In thousands)
<s> <c> <c> <c>
Loans:
Balance outstanding at beginning of period $467,837 $470,331 $417,532
Originations:
Real estate loans:
Residential 46,625 36,291 92,674
Home equity 10,853 8,246 8,084
Commercial 20,797 26,676 29,041
----------------------------------
Total mortgage originations 78,275 71,213 129,799
Commercial and industrial loans 56,778 78,889 74,000
Consumer loans 21,358 26,415 66,869
----------------------------------
Total originations 156,411 176,517 270,668
Purchases of one-to-four family mortgage loans 18,553 - 6,772
----------------------------------
174,964 176,517 277,440
----------------------------------
Less:
Principal repayments, unadvanced funds and
other, net 163,834 178,003 213,193
Loan securitizations 60,268 - 11,091
Loan charge-offs 1,141 773 357
Transfers to foreclosed real estate 286 235 -
----------------------------------
Total deductions 225,529 179,011 224,641
----------------------------------
Ending balance $417,272 $467,837 $470,331
==================================
7
Residential Mortgage Loans and Originations. Westfield Bank originates
mortgage loans secured by one-to-four family properties that serve as the
primary residence of the owner. Most of its loan originations are generated
by referrals from real estate brokers and builders, its marketing efforts and
existing and walk-in customers. As of December 31, 2001, loans on one-to-four
family residential properties accounted for $199.7 million, or 47.86%, of
Westfield Bank's total loan portfolio.
Westfield Bank currently originates residential real estate loans on
either a fixed-rate or adjustable-rate basis, as consumer demand dictates.
The maximum loan-to-value ratios depend on the type of property and the size
of the loan involved. The loan-to-value ratio is the loan amount divided by
the appraised value of the property. The loan-to-value ratio is a measure
commonly used by financial institutions to determine exposure to risk. The
majority of Westfield Bank's real estate loans are originated with a loan-to-
value ratio of 80% or less. Loans originated with loan-to-value ratios in
excess of 80% require the borrower to obtain mortgage insurance.
Beginning on September 1, 2001, Westfield Bank began referring its
residential real estate borrowers to a third party mortgage company.
Residential real estate borrowers submit applications to Westfield Bank, but
the loan is closed on the books of the mortgage company. Westfield Bank
receives a fee of 65 basis points for each of these loans originated by the
third party mortgage company. Under the program, substantially all of
Westfield Bank's residential real estate loans are underwritten and
originated by the third party mortgage company, whose underwriting standards
were similar to those of Westfield Bank. In addition, depending on market
conditions, Westfield Bank may purchase residential real estate loans from
the third party mortgage company. Westfield Bank believes that this program
will diversify its loan portfolio and reduce its interest rate risk.
Westfield Bank's pricing strategy for mortgage loans includes setting
interest rates that are competitive with Fannie Mae and Freddie Mac and other
local financial institutions, and consistent with its internal needs.
Westfield Bank offers fixed-rate loans secured by single family residences.
These loans have contractual maturities of up to 30 years and are fully
amortizing, with payments due monthly. These loans normally remain
outstanding, however, for a substantially shorter period of time because of
refinancing and other prepayments. A significant change in the current level
of interest rates could alter the average life of a residential loan in
Westfield Bank's portfolio considerably. Westfield Bank's residential real
estate loans are generally not assumable, do not contain prepayment penalties
and do not permit negative amortization of principal. Westfield Bank's
residential real estate loans generally contain a "due on sale" clause
allowing it to declare the unpaid principal balance due and payable upon the
sale of the security property.
Westfield Bank also offers a variety of fixed-rate loans that it sells
to investors on a servicing released basis. These loans are underwritten to
the investors' standards and are sold to the investor after the loan closes.
Westfield Bank is an approved seller/servicer for both Fannie Mae and Freddie
Mac.
Westfield Bank offers adjustable-rate mortgage loans with either a one-
year, three-year or five-year term to the initial repricing date. After that
initial period, the interest rate for each adjustable-rate mortgage loan
generally adjusts annually for the remainder of the term of the
8
loan. Westfield Bank uses a different number of indices to reprice its
adjustable-rate mortgage loans.
Westfield Bank's residential adjustable-rate mortgage loans generally
are fully amortizing loans with contractual maturities of up to 30 years,
payments due monthly. Its adjustable-rate mortgage loans generally provide
for specified minimum and maximum interest rates, with a lifetime cap and
floor, and a periodic adjustment on the interest rate over the rate in effect
on the date of origination. As a consequence of using caps, the interest
rates on these loans are not generally as rate sensitive as its cost of
funds. The adjustable-rate mortgage loans that Westfield Bank originates
generally are not convertible into fixed-rate loans.
Adjustable-rate mortgage loans generally pose different credit risks
than fixed-rate loans, primarily because as interest rates rise, the
borrower's payments rises, increasing the potential for default. To date,
Westfield Bank has not experienced difficulty with the payment history for
these loans. At December 31, 2001, its loan portfolio included $73.67 million
in adjustable-rate residential mortgage loans or 17.66% of its total loan
portfolio, and $139.08 million in fixed-rate residential real estate loans,
or 33.33% of its total loan portfolio.
Westfield Bank's home equity lines of credit totaled $13.0 million and
comprised 3.13% of its total loan portfolio at December 31, 2001. These loans
may be originated in amounts of the existing first mortgage, or up to 100% of
the value of the property securing the loan. The term to maturity on
Westfield Bank's home equity and home improvement loans may be up to 15
years.
Commercial Real Estate Loans. Westfield Bank originates commercial real
estate loans to finance the purchase of real property, which generally
consists of apartment buildings, business properties, multi-family investment
properties and construction loans to developers of commercial and residential
properties. In underwriting commercial real estate loans, consideration is
given to the property's historic cash flow, current and projected occupancy,
location and physical condition. At December 31, 2001, Westfield Bank's
commercial real estate loan portfolio consisted of 453 loans, totaling $99.4
million, or 23.82% of total loans.
Substantially all of the commercial real estate portfolio consists of
loans which are collateralized by properties in Westfield Bank's normal
lending area. Westfield Bank's commercial real estate loan portfolio is
diverse, and does not have any significant loan concentration by type of
property or borrower. Westfield Bank generally lends up to a maximum loan-to-
value ratio of 80% on commercial properties and requires a minimum debt
coverage ratio of 1.20 times. Its largest commercial real estate loan
relationship had an outstanding balance of $3.9 million at December 31, 2001
which was secured by apartment buildings located in western Massachusetts.
Westfield Bank also offers construction loans to finance the
construction of commercial properties located in its primary market area.
Westfield Bank had $7.4 million in commercial construction loans and
commitments at December 31, 2001. Of this amount, approximately $4.7 million
were loans made to experienced developers with whom Westfield Bank has an
established relationship, $3.2 million of which was to a prominent developer
to fund a single construction project in Westfield, Massachusetts.
9
Commercial real estate lending involves additional risks compared with
one-to-four family residential lending. Payments on loans secured by
commercial real estate properties often depend on the successful management
of the properties, on the amount of rent from the properties, or on the level
of expenses needed to maintain the properties. Repayment of such loans may
therefore be adversely affected by conditions in the real estate market or
the general economy. Also, commercial real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers. In
order to mitigate this risk, Westfield Bank monitors its loan concentration
on a quarterly basis and its loan policies generally limit the amount of
loans to a single borrower or group of borrowers.
Because of increased risks associated with commercial real estate
loans, Westfield Bank's commercial real estate loans generally have higher
rates and shorter maturities than residential mortgage loans. Westfield Bank
usually offers commercial real estate loans at adjustable rates tied to the
prime rate or to yields on U.S. Treasury securities. The terms of such loans
generally do not exceed 20 years.
Commercial and Industrial Loans. Westfield Bank offers commercial and
industrial loan products and services which are designed to give business
owners borrowing opportunities for modernization, inventory, equipment,
construction, consolidation, real estate, working capital, vehicle purchases
and the financing of existing corporate debt. Westfield Bank offers business
installment loans, vehicle and equipment financing, lines of credit,
equipment leasing and other commercial loans. At December 31, 2001, Westfield
Bank's commercial and industrial loan portfolio consisted of 688 loans,
totaling $47.0 million or 11.27% of its total loans. Since 1996, commercial
and industrial loans have grown $28.7 million, or 156.8% from $18.3 to $47.0
million. In addition, Westfield Bank has added four commercial loan officers
and one business development officer since 1997. Westfield Bank may hire
additional commercial loan officers on an as needed basis in connection with
its potential branch expansion.
As part of Westfield Bank's strategy of increasing its emphasis on
commercial lending, Westfield Bank seeks to attract its business customers'
entire banking relationship. All commercial borrowers are required to
maintain a commercial deposit at Westfield Bank. Westfield Bank also provides
complementary commercial products and services, including an equipment
leasing program with a third party vendor, a variety of commercial deposit
accounts, cash management services, sweep accounts, a broad ATM network and
night deposit services. Commercial loan officers are based in its main and
branch offices, and Westfield Bank views its recent and potential branch
expansion as a means of facilitating these commercial relationships.
Westfield Bank intends to use the proceeds of the stock offering to continue
to expand the volume of its commercial business products and services within
its current underwriting standards.
Westfield Bank's commercial loan portfolio does not have any
significant loan concentration by type of property or borrower. The largest
concentration of loans were for loans to purchase machinery and equipment
which comprise approximately 2.7% of the total loan portfolio. At December
31, 2001, Westfield Bank's largest commercial and industrial loan
relationship was $5.9 million to a local machine distributor that provides
enhanced engineering and design to manufacturing companies in the medical,
electronic and aerospace industries by improving the quality or efficiency of
equipment.
10
Commercial and industrial loans are limited to terms of seven years but
generally have terms of five years or less. Although Westfield Bank does
originate fixed-rate commercial loans, substantially all of its commercial
loans have variable interest rates tied to the prime rate. Whenever possible,
Westfield Bank also collateralizes these commercial and industrial loans with
a lien on commercial real estate. Alternatively, Westfield Bank may
collateralize these loans with a lien on business assets and equipment. In
some cases, both types of liens are required. Westfield Bank also generally
requires the personal guarantee of the business owner. Interest rates on
commercial loans generally have higher yields than residential or commercial
real estate loans.
Commercial and industrial loans are generally considered to involve a
higher degree of risk than residential or commercial real estate loans
because the collateral may be in the form of intangible assets and/or
inventory subject to market obsolescence. Commercial and industrial loans may
also involve relatively large loan balances to single borrowers or groups of
related borrowers, with the repayment of such loans typically dependent on
the successful operation and income stream of the borrower. These risks can
be significantly affected by economic conditions. In addition, business
lending generally requires substantially greater oversight efforts by
Westfield Bank's staff compared to residential or commercial real estate
lending. In order to mitigate this risk, Westfield Bank monitors its loan
concentration and its loan policies generally limit the amount of loans to a
single borrower or group of borrowers. Westfield Bank also utilizes the
services of an outside consultant to conduct on-site credit quality reviews
of the commercial and industrial loan portfolio.
Consumer Loans. Consumer loans are generally originated at higher
interest rates than residential and commercial mortgage loans, but they also
generally tend to have a higher credit risk than residential mortgage loans
because they are usually unsecured or secured by rapidly depreciable assets.
Management, however, believes that offering consumer loan products helps to
expand and create stronger ties to Westfield Bank's existing customer base by
increasing the number of customer relationships and providing cross-marketing
opportunities.
Westfield Bank offers a variety of consumer loans to retail customers
in the communities its serves. Examples of its consumer loans include:
* direct and indirect automobile loans;
* secured passbook loans;
* credit lines tied to deposit accounts to provide overdraft
protection; and
* unsecured personal loans.
At December 31, 2001, the consumer loan portfolio totaled $58.1 million
or 13.92% of total loans. Westfield Bank's increased emphasis on consumer
lending will allow it to diversify its loan portfolio while continuing to
meet the needs of the individuals and businesses that it serves.
Indirect automobile loans currently represent the largest portion of
its consumer loan portfolio, totaling $52.1 million, or 12.49% of its total
loan portfolio and 89.7% of its consumer loan portfolio, at December 31,
2001.
11
Westfield Bank offers fixed-rate automobile loans in a direct and
indirect basis with terms up to 72 months for new and recent model used cars
and up to 60 months for older model used cars. Westfield Bank generally will
make such loans up to 100% of the retail value shown in the NADA Used Car
Guide. The interest rates offered differ depending on the age of the
automobile and current interest rates offered by competitors.
Westfield Bank began offering indirect automobile loans through
automobile dealers approximately eight years ago. Currently, Westfield Bank
maintains contractual relationships with approximately 40 new and used car
dealers located through western Massachusetts and northern Connecticut.
Westfield Bank has a contractual arrangement and outsources a portion of the
origination function and all of the servicing function to a nationally
recognized service provider. The collection and liquidation functions are
handled in-house by Westfield Bank personnel. Indirect auto loans are made
only after an underwriting review and approval under established guidelines
set by Westfield Bank. On loans originated by its automobile dealers,
Westfield Bank compensates the originator based upon the higher interest rate
paid on the loan, up to a maximum of 4%.
For the years ended December 31, 2001 and 2000, Westfield Bank
originated $17.5 million and $20.3 million of automobile loans, respectively,
substantially all of which were originated indirectly through the automobile
dealers. The majority of automobile loans are secured by used automobiles.
The indirect automobile loan portfolio grew substantially in 1999 as the
result of aggressive pricing and the addition of several new dealers.
Management determined to temporarily curtail its indirect lending in fiscal
years 2000 and 2001 to allow the portfolio to become more seasoned, but may
decide to grow the indirect automobile loan portfolio in the future.
Westfield Bank has not sold any of its automobile loans since inception.
Westfield Bank anticipates that in the future it may sell a portion of its
automobile loans in the secondary market for liquidity purposes and to manage
the credit risk of the loan portfolio.
Loans secured by rapidly depreciable assets such as automobiles or that
are unsecured entail greater risks than residential mortgage loans. In such
cases, repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance, since there is
a greater likelihood of damage, loss or depreciation of the underlying
collateral. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. Further, collections on these loans are dependent on the
borrower's continuing financial stability and, therefore, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Repossessed collateral relating to consumer loans at December 31, 2001
approximated $325,000. Finally, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit
the amount which can be recovered on such loans if a borrower defaults.
Loan Approval Procedures and Authority. As established by the Executive
Committee of the Board of Directors, Westfield Bank's lending policies
provide that its mortgage underwriting department may review and approve
mortgage loans up to $500,000. Westfield Bank's underwriting department also
may review and approve home equity loans up to $100,000. Any loan
applications, including mortgage loans, that exceed $500,000 or $100,000 for
home equity loans require approval of the Executive Committee. For loans
requiring board approval, management is responsible for presenting to the
board information about the creditworthiness of a borrower and the estimated
value of the subject property. Generally, the estimated value of the
12
property must be supported by an independent appraisal report prepared in
accordance with Westfield Bank's appraisal policy.
The following generally describes Westfield Bank's current lending
procedures. Upon receipt of a completed loan application from a prospective
borrower, Westfield Bank must order a credit report and verify other
information. If necessary, Westfield Bank obtains additional financial or
credit related information. Westfield Bank requires an appraisal for all
mortgage loans. Appraisals for mortgage loans are performed by licensed or
certified third-party appraisal firms and are reviewed by Westfield Bank's
lending department. Appraisals for second mortgages or home equity loans are
not required. Rather, a designated employee of Westfield Bank conducts an
inspection of the property. Westfield Bank requires title insurance on all
mortgage loans and certain other loans. Westfield Bank requires borrowers to
obtain hazard insurance. Westfield Bank also requires borrowers to obtain
flood insurance, if applicable, prior to closing. In addition, Westfield Bank
makes available to borrowers the option to advance funds on a monthly basis
together with each payment of principal and interest to a mortgage escrow
account from which it makes disbursements for items such as real estate
taxes, flood insurance, and private mortgage insurance premiums. Beginning on
September 1, 2001, Westfield Bank began originating its residential real
estate loans by referring its customers to a third-party mortgage company.
Residential real estate borrowers submit applications to Westfield Bank, but
the loan is closed on the books of the mortgage company.
Asset Quality. One of Westfield Bank's key operating objectives has
been and continues to be the achievement of a high level of asset quality.
Westfield Bank maintains a large proportion of loans secured by residential
and commercial properties, set sound credit standards for new loan
originations and follow careful loan administration procedures. Westfield
Bank also utilizes the services of an outside consultant to conduct on-site
credit quality reviews of Westfield Bank's commercial and industrial loan
portfolio on an annual basis. These practices and relatively favorable
economic and real estate market conditions have resulted in historically low
delinquency ratios and, in recent years, a low level of nonaccrual loans.
These factors have helped strengthen Westfield Bank's financial condition.
Delinquent Loans and Foreclosed Assets. Westfield Bank's policies
require that management continuously monitor the status of the loan portfolio
and report to the Board of Directors on a monthly basis. These reports
include information on delinquent loans and foreclosed real estate, as well
as Westfield Bank's actions and plans to cure the delinquent status of the
loans and to dispose of the foreclosed property.
13
The following table presents information regarding non-accrual mortgage
and consumer and other loans, and foreclosed real estate as of the dates
indicated. All loans where the interest payment is 90 days or more in arrears
as of the closing date of each month are placed on non-accrual status. At
December 31, 2001, 2000, and 1999, Westfield Bank had $2.7 million, $2.3
million, and $2.8 million, respectively, of non-accrual loans.
At December 31,
--------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c>
Non-accrual real estate loans:
Residential $1,866 $1,180 $ 864 $ 262 $ 328
Home equity 14 113 - - 42
Commercial real estate 536 247 1,496 262 95
--------------------------------------------------
Total non-accrual real estate loans 2,416 1,540 2,360 524 465
Other loans:
Commercial and industrial 183 392 35 137 206
Consumer 85 376 356 177 268
--------------------------------------------------
Total non-accrual consumer and other loans $2,684 $2,308 $2,751 $ 838 $ 939
==================================================
Total nonperforming loans $2,684 $2,308 $2,751 $ 838 $ 939
Foreclosed real estate, net 176 - - 221 984
--------------------------------------------------
Total nonperforming assets $2,860 $2,308 $2,751 $1,059 $1,923
==================================================
Nonperforming loans to total loans 0.64% 0.49% 0.58% 0.20% 0.24%
Nonperforming assets to total assets 0.37 0.33 0.43 0.18 0.35
14
Allowance for Loan Losses. The following table presents the activity in
Westfield Bank's allowance for loan losses and other ratios at or for the
dates indicated.
At or for Years Ended December 31,
------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
<s> <c> <c> <c> <c> <c>
Balance at beginning of period $ 3,434 $ 3,118 $ 2,632 $ 2,791 $ 3,094
Charge-offs:
Residential (16) (12) (19) (292) (35)
Commercial real estate (17) (20) - (8) (47)
Home equity loans - - - - (48)
Commercial and industrial (26) (42) (5) (156) (254)
Consumer (1,784) (985) (521) (294) (190)
------------------------------------------------------------
Total charge-offs (1,843) (1,059) (545) (750) (574)
------------------------------------------------------------
Recoveries:
Residential - - 30 90 8
Commercial real estate - - 5 95 14
Home equity loans - - - 9 -
Commercial 14 8 18 57 5
Consumer and industrial 688 278 135 47 44
------------------------------------------------------------
Total recoveries 702 286 188 298 71
------------------------------------------------------------
Net charge-offs (1,141) (773) (357) (452) (503)
Provision for loan losses 1,630 1,089 843 293 200
------------------------------------------------------------
Balance at end of period $ 3,923 $ 3,434 $ 3,118 $ 2,632 $ 2,791
============================================================
Total loans receivable(1) $417,272 $467,837 $470,331 $417,532 $387,579
============================================================
Average loans outstanding $443,652 $464,917 $443,982 $402,851 $376,191
============================================================
Allowance for loan losses as a
percent of total loans
receivable 0.94% 0.73% 0.66% 0.63% 0.72%
Net loans charged off a percent of
average loans outstanding 0.26% 0.17% 0.08% 0.11% 0.13%
<FN>
- --------------------
<F1> Does not include deferred fees.
</FN>
15
Westfield Bank maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio based on ongoing quarterly assessments of the
estimated losses. Westfield Bank's methodology for assessing the
appropriateness of the allowance consists of a review of the components,
which include a specific allowance for identified problem loans and a formula
allowance for current performing loans. Fluctuations in the balances of
impaired loans affect the specific reserve while fluctuations in volume and
concentrations of loans affects the formula reserve and the allocation of the
allowance of the loan losses among loan types.
The specific allowance incorporates the results of measuring impairment
for specifically identified non-homogenous problem loans in accordance with
Statement of Financial Accounting Standards (SFAS) No. 114 "Accounting By
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures." In
accordance with SFAS No.s 114 and 118 the specific allowance reduces the
carrying amount of the impaired loans to their estimated fair value. A loan
is recognized as impaired when it is probable that principal and/or interest
are not collectible in accordance with the loan's contractual terms. A loan
is not deemed to be impaired if there is a short delay in receipt of payment
or if, during a longer period of delay, the Westfield Bank expects to collect
all amounts due including interest accrued at the contractual rate during the
period of delay. Measurement of impairment can be based on the present value
of expected future cash flows discounted at the loan's effective interest
rate, the loan's observable market price or the fair value of the collateral,
if the loan is collateral dependent. Measurement of impairment does not apply
to large groups of smaller balance homogenous loans that are collectively
evaluated for impairment such as the Westfield Bank portfolios of home equity
loans, real estate mortgages, installment and other loans.
The formula allowance is calculated by applying loss factors to
outstanding loans by type, excluding loans for which a specific allowance has
been determined. As part of this analysis, each quarter Westfield Bank
prepares an allowance for loan losses worksheet which categorizes the loan
portfolio by risk characteristics such as loan type and loan grade. Changes
in the mix of loans and the internal loan grades affect the amount of the
formula allowance. Loss factors are assigned to each category based on
Westfield Bank's assessment of each category's inherent risk. In determining
the loss factors to apply to each loan category, Westfield Bank considers
historical losses, peer group comparisons, industry data and loss percentages
used by banking regulators for similarly graded loans. Loss factors may be
adjusted for qualitative factors that, in management's judgment, affect the
collectibility of the portfolio as of the evaluation date. Loss factors are
described as follows:
* Classified loan loss factors are derived from loss percentages utilized
by banking regulators for similarly graded loans. Loss factors of 3% to
5%, 10% to 15% and 50% to 75% are applied to the outstanding balance of
loans internally classified special mention, substandard and doubtful,
respectively.
* Pass graded loan loss factors are based on actual losses for the
previous twelve quarters adjusted for qualitative factors, such as new
loan products, credit quality trends (including trends in nonperforming
loans expected to result from existing conditions), collateral values,
loan volumes and concentrations and specific industry conditions within
portfolio segments that exist at the balance sheet date. The loss
factors are applied to outstanding loans by loan type.
16
In addition, management employs an independent third party to perform
an annual review of all of Westfield Bank's commercial loans with principal
balances greater than $600,000. A second objective was to review all watch
list loans with aggregate balances greater than $100,000 and all 30 day or
longer past due commercial loans with balances in excess of $50,000.
Westfield Bank's methodologies include several factors that are
intended to reduce the difference between estimated and actual losses. The
loss factors that are used to establish the allowance for pass graded loans
are designated to be self-correcting by taking into account changes in loan
classification, loan concentrations and loan volumes and by permitting
adjustments based on management's judgments of qualitative factors as of the
evaluation date. Similarly, by basing the pass graded loan loss factors on
loss experience over the prior three years, the methodology is designated to
take Westfield Bank's recent loss experience into account.
Westfield Bank's allowance methodology has been applied on a consistent
basis. Based on this methodology, Westfield Bank believes that it has
established and maintained the allowance for loan losses at adequate levels,
future adjustments to the allowance for loan losses, however, may be
necessary if economic, real estate and other conditions differ substantially
from the current operating environment resulting in estimated and actual
losses differing substantially. Adjustments to the allowance for loan losses
are charged to income through the provision for loan losses.
A summary of the components of the allowance for loan losses as of
December 31, 2001, December 31, 2000 and December 31, 1999 is as follows:
December 31, 2001 December 31, 2000 December 31, 1999
----------------------------- ----------------------------- -----------------------------
Specific Formula Total Specific Formula Total Specific Formula Total
-------- ------- ----- -------- ------- ----- -------- ------- -----
(In Thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Real estate mortgage
Residential $ - $ 839 $ 839 $ - $ 859 $ 859 $ - $ 682 $ 682
Commercial 32 1,435 1,467 49 1,187 1,236 136 1,057 1,193
Commercial and Industrial 53 946 999 28 551 579 - 397 397
Consumer - 618 618 - 760 760 - 846 846
---------------------------------------------------------------------------------------------
Total $85 $3,838 $3,923 $77 $3,357 $3,434 $136 $2,982 $3,118
=============================================================================================
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review Westfield Bank's loan and foreclosed
real estate portfolios and the related allowance for loan losses and
valuation allowance for foreclosed real estate. These agencies, including the
Federal Deposit Insurance Corporation and the Massachusetts Division of
Banks, may require Westfield Bank to adjust the allowance for loan losses or
the valuation allowance for foreclosed real estate based on their judgments
of information available to them at the time of their examination, thereby
adversely affecting Westfield Bank's results of operations.
For the year ended December 31, 2001, Westfield Bank provided $1.6
million to the allowance for loan losses based on its evaluation of the items
discussed above. Westfield Bank believes that the current allowance for loan
losses accurately reflects the level of risk in the current loan portfolio.
17
Allocation of Allowance for Loan Losses. The following tables set forth
the allowance for loan losses allocated by loan category, the total loan
balances by category, and the percent of loans in each category to total
loans indicated.
At December 31,
-----------------------------------------------------------------------------------------------------------
2001 2000 1999
-----------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of
Loan Loans in Each Loan Loans in Each Loan Loans in Each
Amount of Balances Category to Amount of Balances Category to Amount of Balances Category to
Loan Category Loan Loss by Category Total Loans Loan Loss by Category Total Loans Loan Loss by Category Total Loans
- ------------- --------- ----------- ------------- --------- ----------- ------------- --------- ----------- -------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Real estate - mortgage:
Residential(1) $ 839 $212,751 50.98% $ 859 $264,162 56.47% $ 682 $264,883 56.32%
Commercial 1,467 99,425 23.83 1,236 92,826 19.84 1,193 89,333 18.99
Commercial loans 999 47,012 11.27 579 37,510 8.02 397 32,673 6.95
Consumer loans(2) 618 58,084 13.92 760 73,339 15.67 846 83,442 17.74
------------------------------------------------------------------------------------------------------
Total allowance
for loan losses $3,923 $417,272 100.00% $3,434 $467,837 100.00% $3,118 $470,331 100.00%
======================================================================================================
At December 31,
-----------------------------------------------------------------------
1998 1997
-----------------------------------------------------------------------
Percent of Percent of
Loan Loans in Each Loan Loans in Each
Amount of Balances Category to Amount of Balances Category to
Loan Category Loan Loss by Category Total Loans Loan Loss by Category Total Loans
- ------------- --------- ----------- ------------- --------- ----------- -------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Real estate - mortgage:
Residential(1) $ 675 $254,830 61.03% $ 728 $238,951 61.65%
Commercial 1,344 90,026 21.56 1,604 96,151 24.81
Commercial loans 301 25,353 6.07 226 21,396 5.52
Consumer loans(2) 312 47,323 11.34 233 31,081 8.02
------------------------------------------------------------------
Total allowance
for loan losses $2,632 $417,532 100.00% $2,791 $387,579 100.00%
==================================================================
<FN>
- --------------------
<F1> Includes home equity loans.
<F2> Excludes passbook loans.
</FN>
18
Investment Activities The Board of Directors reviews and approves
Westfield Bank's investment policy on an annual basis. The President and
Treasurer, as authorized by the Board, implement this policy based on the
established guidelines within the written policy.
Westfield Bank's investment policy is designed primarily to manage the
interest rate sensitivity of its assets and liabilities, to generate a
favorable return without incurring undue interest rate and credit risk, to
complement its lending activities and to provide and maintain liquidity
within the range established by policy. In determining Westfield Bank's
investment strategies, it considers its interest rate sensitivity, yield,
credit risk factors, maturity and amortization schedules, and other
characteristics of the securities to be held.
Massachusetts-chartered savings banks have authority to invest in
various types of assets, including U.S. Treasury obligations, securities of
various federal agencies, mortgage-backed securities, certain certificates of
deposit of insured financial institutions, repurchase agreements, overnight
and short term loans to other banks, corporate debt instruments, and equity
securities.
Securities Portfolio Westfield Bank classifies securities as held to
maturity or available for sale at the date of purchase. Westfield Bank does
not have any securities classified as trading. Held to maturity securities
are reported at cost, adjusted for amortization of premium and accretion of
discount. Available for sale securities are reported at fair market value. At
December 31, 2001, held to maturity securities totaled $126.6 million, or 44%
of the total securities portfolio, and available for sale investments totaled
$161.3 million, or 56% of Westfield Bank's total securities portfolio.
Westfield Bank classifies U.S. Government securities and U.S. Government
Agency securities as available for sale and held to maturity. These
securities predominately have maturities of less than five years, although
Westfield Bank also invests in adjustable rate securities with maturities of
up to 15 years. Westfield Bank's mortgage-backed securities, which are
directly or indirectly insured or guaranteed by Freddie Mac, Ginnie Mae or
Fannie Mae or are rated AAA, consist of both 30-year securities and seven-
year balloon securities. The latter are so named because they mature (i.e.
balloon) prior to completing their normal 30-year amortization. The 30-year
mortgage backed securities are classified as held to maturity while the seven
year balloon securities are classified as available for sale. In addition,
Westfield Bank has investments in Federal Home Loan Bank stock and other
equity securities.
19
Securities Portfolio. The following table sets forth the composition of
Westfield Bank's securities portfolio at the dates indicated.
At December 31,
----------------------------------------------------------------------------
2001 2000 1999
---------------------- ---------------------- ----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(In thousands)
<s> <c> <c> <c. <c> <c> <c>
Securities:
U.S. Government securities $ - $ - $ - $ - $ 4,997 $ 5,007
Federal agency securities 56,895 57,380 43,188 43,578 35,426 34,878
Other debt securities 47,087 48,284 62,352 62,126 48,722 47,982
----------------------------------------------------------------------------
Total securities 103,982 105,664 105,540 105,704 89,145 87,867
----------------------------------------------------------------------------
Mortgage-backed and mortgage-
related securities:
Ginnie Mae 29,233 29,277 9,904 9,907 2,511 2,420
Fannie Mae 59,749 60,825 33,729 33,584 22,869 21,915
Freddie Mac 49,960 50,296 5,685 5,720 3,650 3,658
Collateralized mortgage
obligations 27,973 28,119 10,016 10,233 - -
----------------------------------------------------------------------------
Total mortgage-backed and
mortgage-related securities 166,915 168,517 59,334 59,444 29,030 27,993
----------------------------------------------------------------------------
Marketable equity securities 14,320 14,675 8,063 9,744 6,303 9,194
----------------------------------------------------------------------------
Total securities $285,217 $288,856 $172,937 $174,892 $124,478 $125,054
============================================================================
20
Mortgage-Backed Securities and Mortgage-Related Securities. The
following table sets forth the amortized cost and fair value of Westfield
Bank's mortgage-backed and mortgage-related securities, which are classified
as available for sale or held to maturity at the dates indicated.
At December 31,
----------------------------------------------------------------------------------------
2001 2000 1999
---------------------------- --------------------------- ----------------------------
Amortized Percent Market Amortized Percent Market Amortized Percent Market
Cost of Total Value Cost of Total Value Cost of Total Value
--------- -------- ------ --------- -------- ------ --------- -------- ------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Mortgage-backed and mortgage-related
securities available for sale:
Ginnie Mae $ 22,018 13.19% $ 22,053 $ 8,610 14.51% $ 8,644 $ 1,634 5.63% $ 1,580
Fannie Mae 35,822 21.46 36,822 29,174 49.17 28,933 20,790 71.62 19,889
Freddie Mac 18,490 11.08 18,553 4,728 7.97 4,770 2,099 7.23 2,099
Collateralized mortgage obligations 9,578 5.74 9,722 10,016 16.88 10,233 - - -
----------------------------------------------------------------------------------------
Total mortgage-backed and mortgage
related securities available for sale 85,908 51.47 87,150 52,528 88.53 52,580 24,523 84.47 23,568
----------------------------------------------------------------------------------------
Mortgage-back and mortgage related
securities held to maturity:
Ginnie Mae 7,215 4.32 7,224 1,294 2.18 1,263 877 3.02 840
Fannie Mae 23,927 14.34 24,003 4,555 7.68 4,651 2,079 7.16 2,026
Freddie Mac 31,470 18.85 31,743 957 1.61 950 1,551 5.34 1,559
Collateralized mortgage obligations 18,395 11.02 18,397 - - - - - -
----------------------------------------------------------------------------------------
Total mortgage-backed and mortgage
related securities held to maturity 81,007 48.53 81,367 6,806 11.47 6,864 4,507 15.53 4,425
----------------------------------------------------------------------------------------
Total mortgage-backed and mortgage
related securities $166,915 100.00% $168,517 $ 59,334 100.00% $ 59,444 $ 29,030 100.00% $ 27,993
========================================================================================
21
Securities Portfolio Maturities. The composition and maturities of the
securities portfolio (debt securities) and the mortgage-backed securities
portfolio at December 31, 2001 are summarized in the following table.
Maturities are based on the final contractual payment dates, and do not
reflect the impact of prepayments or redemptions that may occur.
More than One Year More than Five Years
One Year or Less through Five Years through Ten Years
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- --------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
Securities available for sale:
U.S. Government securities $ -- --% $ -- --% $ -- --%
Federal agency securities 1,000 6.61 20,143 4.61 1,182 3.24
Other debt securities 10,328 6.67 18,457 6.37 -- --
------- ------- -------
Total securities 11,328 6.66 38,600 5.46 1,182 3.24
------- ------- -------
Mortgage-backed securities available
for sale:
Ginnie Mae -- -- -- -- -- --
Fannie Mae -- -- 172 6.00 -- --
Freddie Mac 227 6.00 2,802 2.44 -- --
Collateralized mortgage obligations -- -- -- -- -- --
------- ------- -------
Total mortgage-back securities 227 6.00 2,974 2.65 -- --
------- ------- -------
Total $11,555 6.65 $41,574 5.25 $ 1,182 3.24
======= ======= =======
Securities held to maturity:
U.S. Government securities -- -- -- -- -- --
Federal agency securities 3,000 6.00 27,002 4.33 -- --
Other debt securities 8,013 6.79 7,486 6.98 113 4.17
------- ------- -------
Total investment securities 11,013 6.58 34,488 4.90 113 4.17
------- ------- -------
Mortgage-backed securities held
to maturity:
Ginnie Mae -- -- 74 4.65 884 4.39
Fannie Mae -- -- -- -- 4,118 4.93
Freddie Mac 194 7.50 1,002 1.58 6,921 4.01
Collateralized mortgage obligations -- -- -- -- -- --
------- ------- -------
Total mortgage-backed securities 194 7.50 1,076 1.79 11,923 4.36
------- ------- -------
Total $11,207 6.59 $35,564 4.81 $12,036 4.36
======= ======= =======
More than Ten Years Total Securities
--------------------- ---------------------------------
Weighted Weighted
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
--------- -------- --------- ------ --------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c>
Securities available for sale:
U.S. Government securities $ -- --% $ -- $ -- --%
Federal agency securities 4,568 4.14 26,893 27,237 4.26
Other debt securities 2,690 2.54 31,475 32,272 6.14
------- -------- --------
Total securities 7,258 3.55 58,368 59,509 5.27
------- -------- --------
Mortgage-backed securities available
for sale:
Ginnie Mae 22,018 5.08 22,018 22,053 5.08
Fannie Mae 35,650 6.40 35,822 36,822 6.18
Freddie Mac 15,461 5.64 18,490 18,553 5.16
Collateralized mortgage obligations 9,578 6.24 9,578 9,722 6.24
------- -------- --------
Total mortgage-back securities 82,706 5.89 85,908 87,150 5.69
------- -------- --------
Total $89,965 5.70 $144,276 $146,659 5.52
======= ======== ========
Securities held to maturity:
U.S. Government securities -- -- -- -- --
Federal agency securities -- -- 30,002 30,143 4.50
Other debt securities -- -- 15,612 16,012 6.86
------- -------- --------
Total investment securities -- -- 45,614 46,155 5.31
------- -------- --------
Mortgage-backed securities held
to maturity:
Ginnie Mae 6,257 6.17 7,215 7,224 5.93
Fannie Mae 19,809 5.56 23,927 24,003 5.45
Freddie Mac 23,353 6.02 31,470 31,743 4.26
Collateralized mortgage obligations 18,395 5.57 18,395 18,397 5.57
------- -------- --------
Total mortgage-backed securities 67,814 5.78 81,007 81,367 5.06
------- -------- --------
Total $67,814 5.77 $126,621 $127,522 5.15
======= ======== ========
22
Sources of Funds
General. Deposits, scheduled amortization and prepayments of loan
principal, maturities and calls of investments securities and funds provided
by operations are Westfield Bank's primary sources of funds for use in
lending, investing and for other general purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Deposits. Westfield Bank offers a variety of deposit accounts having a
range of interest rates and terms. Westfield Bank currently offers regular
savings deposits (consisting of passbook and statement savings accounts),
interest-bearing demand accounts, noninterest-bearing demand accounts, money
market accounts and time deposits. Westfield Bank has expanded the types of
deposit products that it offers to include jumbo certificates of deposit,
tiered money market accounts and customer repurchase agreements to compliment
its increased emphasis on attracting commercial banking relationships.
Deposit flows are influenced significantly by general and local
economic conditions, changes in prevailing interest rates, pricing of
deposits and competition. Westfield Bank's deposits are primarily obtained
from areas surrounding our offices. Westfield Bank relies primarily on paying
competitive rates, service and long-standing relationships with customers to
attract and retain these deposits. Westfield Bank does not use brokers to
obtain deposits.
When Westfield Bank determines its deposit rates, it considers local
competition, U.S. Treasury securities offerings and the rates charged on
other sources of funds. Core deposits (defined as regular accounts, money
market accounts, NOW accounts and demand accounts) represented 40.3% of total
deposits on December 31, 2001 and 38.1% on December 31, 2000. At December 31,
2001 and December 31, 2000, time deposits with remaining terms to maturity of
less than one year amounted to $282.2 million and $281.5 million,
respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Net Interest and Dividend Income" for
information relating to the average balances and costs of Westfield Bank's
deposit accounts for the years ended December 31, 2001, 2000, 1999.
23
Deposit Distribution Weighted Average. The following table sets forth
the distribution of Westfield Bank's deposit accounts, by account type, at
the dates indicated.
At December 31,
---------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rates Amount Percent Rates Amount Percent Rates
------ ------- -------- ------ ------- -------- ------ ------- --------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Demand deposits (1) $ 48,247 7.57% 0.00% $ 38,500 6.40% 0.00% $ 29,591 5.36% 0.00%
NOW deposits 38,758 6.08 1.69 34,519 5.73 2.37 34,029 6.18 2.21
Regular accounts 42,673 6.70 1.05 42,348 7.04 1.07 50,285 9.13 1.06
Money market accounts 127,085 19.95 2.02 113,787 18.90 3.74 113,561 20.61 3.34
----------------- ----------------- -----------------
Total non-certificated
accounts 256,763 40.30 1.43 229,154 38.07 2.41 227,466 41.28 2.28
----------------- ----------------- -----------------
Time certificates of deposit
Due within 1 year 282,245 44.30 4.44 281,461 46.76 5.76 206,322 37.44 4.90
Over 1 year through 3 years 95,357 14.97 4.93 90,740 15.08 5.94 116,822 21.20 5.54
Over 3 years 2,744 0.43 4.36 541 0.09 5.58 414 0.08 4.95
----------------- ----------------- -----------------
Total certificated accounts 380,346 59.70% 4.56 372,742 61.93 5.79 323,558 58.72 5.13
----------------- ----------------- -----------------
Total $637,109 100.00% 3.30 $601,896 100.00% 4.51 $551,024 100.00% 3.94
================= ================= =================
<FN>
- --------------------
<F1> Includes mortgagor's escrow payments.
</FN>
C.D. Maturities. At December 31, 2001, Westfield Bank had $78.7 million
in time certificates of deposits with balances of $100,000 and over maturing
as follows:
Weighted
Average
Maturity Period Amount Rate
- ----------------------------------------------------------------------------
(Dollars in thousands)
<s> <c> <c>
Three months or less $23,745 4.38%
Over three months through six months 16,382 4.23
Over six months through 12 months 17,267 4.34
Over 12 months 21,257 5.35
------- ----
Total $78,651 4.60
======= ====
C.D. Balances by Rates. The following table sets forth, by interest
rate ranges, information concerning Westfield Bank's time certificates of
deposit at the dates indicated.
At December 31, 2001
------------------------------------------------------------------------------------------
Period to Maturity
------------------------------------------------------------------------------------------
Less than One to Two Two to More than
One Year Years Three Years Three Years Total Percent of Total
--------- ---------- ----------- ----------- ----- ----------------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c>
4.00% and below $ 78,469 $10,572 $ 1,272 $ -- $ 90,313 24%
4.01% to 5.00% 134,389 33,225 13,749 2,733 184,096 49
5.01% to 6.00% 45,976 17,623 10,282 11 73,892 19
6.01% to 7.00% 23,411 8,063 571 -- 32,045 8
-----------------------------------------------------------------------------------
Total $282,245 $69,483 $25,874 $2,744 $380,346 100%
===================================================================================
Borrowings. In addition to deposits, borrowings from the Federal Home
Loan Bank are available as an additional source of funds to finance Westfield
Bank's lending and investing activities. Westfield Bank traditionally has not
relied upon borrowings from the Federal Home Loan Bank. However, in 1999,
Westfield Bank borrowed $5.0 million from the Federal Home Loan Bank to meet
increased liquidity demand for Year 2000 purposes.
24
Personnel
As of December 31, 2001, Westfield Bank had 141 full-time employees and
26 part-time employees. The employees are not represented by a collective
bargaining unit, and we consider our relationship with our employees to be
excellent.
FEDERAL AND STATE TAXATION
Federal
General. For federal income tax purposes, we report income on the basis
of a taxable year ending December 31, using the accrual method of accounting,
and we are generally subject to federal income taxation in the same manner as
other corporations. Westfield Bank and Westfield Financial constitute an
affiliated group of corporations and, therefore, are eligible to report their
income on a consolidated basis. Because Westfield Mutual Holding Company owns
less than 80% of the common stock of Westfield Financial, it is not a member
of such affiliated group and therefore, must report its income on a separate
return. Westfield Bank and Westfield Mutual Holding Company are not currently
under audit by the IRS.
Distributions. To the extent that Westfield Bank makes "non-dividend
distributions" to Westfield Financial, such distributions will be considered
to result in distributions from unrecaptured tax bad debt reserve as of
December 31, 1987 (our "base year reserve"), to the extent thereof and then
from supplemental reserve for losses on loans, and an amount based on the
amount distributed will be included in income. Non-dividend distributions
include distributions in excess of current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. Dividends paid out of current or accumulated earnings
and profits will not be included in income.
The amount of additional income created from a non-dividend
distribution is equal to the lesser of the base year reserve and supplemental
reserve for losses on loans or an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution. Thus,
in some situations, approximately one and one-half times the non-dividend
distribution would be includible in gross income for federal income tax
purposes, assuming a 34% federal corporate income tax rate. Westfield Bank
does not intend to pay dividends that would result in the recapture of any
portion of the bad debt reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986,
as amended (the "Code"), imposes a tax on alternative minimum taxable income
at a rate of 20%. Only 90% of alternative minimum taxable income can be
offset by net operating loss carryovers of which we currently have none.
Alternative minimum taxable income is also adjusted by determining the tax
treatment of certain items in a manner that negates the deferral of income
resulting from the regular tax treatment of those items. We have not been
subject to a tax on alternative minimum taxable income during the past five
years.
Elimination of Dividends; Dividends Received Deduction. Westfield
Financial may exclude from its income 100% of dividends received from
Westfield Bank as a member of the same affiliated group of corporations.
Because Westfield Mutual Holding Company is not a member of such affiliated
group, it does not qualify for such 100% dividends exclusion, but is
25
entitled to deduct 80% of the dividends it receives from Westfield Financial
so long as it owns more than 20% of the common stock.
State
Westfield Bank files Massachusetts Financial Institution excise tax
returns. Generally, the income of financial institutions in Massachusetts,
which is calculated based on federal taxable income, subject to certain
adjustments, is subject to Massachusetts tax. Westfield Bank is not currently
under audit with respect to its Massachusetts income tax returns and its
state tax returns have not been audited for the past five years.
Westfield Financial is also required to file a Massachusetts income tax
return and is generally subject to a state income tax rate that is the same
tax rate as the tax rate for financial institutions in Massachusetts.
However, Westfield Securities Corp. is taxed at a rate that is currently
lower than income tax rates for savings institutions in Massachusetts.
REGULATION
General
Westfield Bank is a Massachusetts-chartered savings bank, and its
deposit accounts are insured up to applicable limits by the Bank Insurance
Fund of the FDIC and by the Depositors Insurance Fund. Westfield Bank is
subject to extensive regulation, examination and supervision by the
Commonwealth of Massachusetts Division of Banks as its primary corporate
regulator, and by the FDIC as the deposit insurer.
Westfield Financial as the bank holding company controlling Westfield
Bank, is subject to the Bank Holding Company Act of 1956, as amended, and the
rules and regulations of the Federal Reserve Board under the Bank Holding
Company Act. Westfield Financial are also subject to the provisions of the
Massachusetts General Laws applicable to savings banks and other depository
institutions and their holding companies (the Massachusetts banking laws) and
the regulations of the Massachusetts Division of Banks under the
Massachusetts banking laws applicable to bank holding companies. Westfield
Financial is also subject to the rules and regulations of the Securities and
Exchange Commission.
Any change in such laws and regulations, whether by the Division, the
FDIC, the Federal Reserve Board, or the Securities and Exchange Commission or
through legislation, could have a material adverse impact on Westfield
Financial and Westfield Bank and their operations and stockholders.
Massachusetts Banking Regulation
Community Reinvestment Act. Westfield Bank is subject to provisions of
the Massachusetts Community Reinvestment Act, which are similar to those
imposed by the federal Community Reinvestment Act with the exception of the
assigned exam ratings. Massachusetts banking law provides for an additional
exam rating of "high satisfactory" in addition to the federal Community
Reinvestment Act ratings of "outstanding," "satisfactory," "needs to improve"
and "substantial noncompliance." The Division is required to consider a
bank's
26
Massachusetts Community Reinvestment Act rating when reviewing the bank's
application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices or automated teller
machines, and provides that such assessment may serve as a basis for the
denial of any such application. The Massachusetts Community Reinvestment Act
requires the Division to assess a bank's compliance with the Massachusetts
Community Reinvestment Act and to make such assessment available to the
public. Westfield Bank's latest Massachusetts Community Reinvestment Act
rating, received by letter, dated October 30 2001, from the Division was a
rating of "satisfactory."
Loans-to-One-Borrower Limitations. With specified exceptions, the total
obligations of a single borrower to a Massachusetts chartered savings bank
may not exceed 20% stockholder's equity. A savings bank may lend additional
amounts up to 100% of the bank's retained earnings account if secured by
collateral meeting the requirements of the Massachusetts banking laws.
Westfield Bank currently complies with applicable loans-to-one-borrower
limitations.
Dividends. Under the Massachusetts banking laws, a stock savings bank
may, subject to several limitations, declare and pay a dividend on its
capital stock out of the bank's net profits. A dividend may not be declared,
credited or paid by a stock savings bank so long as there is any impairment
of capital stock. No dividend may be declared on the bank's common stock for
any period other than for which dividends are declared upon preferred stock,
except as authorized by the Commissioner. The approval of the Commissioner is
also required for a stock savings bank to declare a dividend, if the total of
all dividends declared by the savings bank in any calendar year shall exceed
the total of its net profits for that year combined with its retained net
profits of the preceding two years, less any required transfer to surplus or
a fund for the retirement of any preferred stock.
In addition, federal law may also limit the amount of dividends that
may be paid by Westfield Bank. See "- Federal Banking Regulation - Prompt
Corrective Action."
Examination and Enforcement. The Division is required to periodically
examine savings banks at least once every calendar year or at least once each
18-month period if the savings bank qualifies as well capitalized under the
prompt corrective action provisions of the Federal Deposit Insurance Act. See
"- Federal Banking Regulation - Prompt Corrective Action."
Federal Banking Regulation
Capital Requirements. FDIC regulations require banks whose deposits are
insured by the Bank Insurance Fund, such as Westfield Bank, to maintain
minimum levels of capital. The FDIC regulations define two tiers, or classes,
of capital, Tier 1 capital and Tier 2 capital.
The FDIC regulations establish a minimum leverage capital requirement
for banks in the strongest financial and managerial condition, with a rating
of 1 (the highest examination rating of the FDIC for banks) under the Uniform
Financial Institutions Rating System, of not less than a ratio of 3.0% of
Tier 1 capital to total assets. For all other banks, the minimum leverage
capital requirement is 4.0%, unless a higher leverage capital ratio is
warranted by the particular circumstances or risk profile of the depository
institution.
27
The FDIC regulations also require that savings banks meet a risk-based
capital standard. The risk-based capital standard requires the maintenance of
a ratio of total capital, which is defined as the sum of Tier 1 capital and
Tier 2 capital, to risk-weighted assets of at least 8% and a ratio of Tier 1
capital to risk-weighted assets of at least 4%. In determining the amount of
risk-weighted assets, all assets, plus certain off balance sheet items, are
multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC
believes are inherent in the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines
in the economic value of a bank's capital due to changes in interest rates
when assessing the bank's capital adequacy. Under such a risk assessment,
examiners will evaluate a bank's capital for interest rate risk on a case-by-
case basis, with consideration of both quantitative and qualitative factors.
Institutions with significant interest rate risk may be required to
hold additional capital. The agencies also issued a joint policy statement
providing guidance on interest rate risk management, including a discussion
of the critical factors affecting the agencies' evaluation of interest rate
risk in connection with capital adequacy.
As of December 31, 2001, Westfield Bank was considered "well
capitalized" under FDIC guidelines.
Activity Restrictions on State-Chartered Banks. Section 24 of the
Federal Deposit Insurance Act, as amended, which was added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDIC Improvement Act),
generally limits the activities as principal and investments of state-
chartered FDIC insured banks and their subsidiaries to those permissible for
federally chartered national banks and their subsidiaries, unless such
activities and investments are specifically exempted by Section 24 or
consented to by the FDIC.
Section 24 provides an exception for investments by a bank in common
and preferred stocks listed on a national securities exchange or the shares
of registered investment companies if:
* the bank held such types of investments during the 14-month
period from December 31, 1990 through November 26, 1991;
* the state in which the bank is chartered permitted such
investments as of December 31, 1991; and
* the bank notifies the FDIC and obtains approval from the FDIC to
make or retain such investments. Upon receiving such FDIC
approval, an institution's investment in such equity securities
will be subject to an aggregate limit up to the amount of its
Tier 1 capital.
Westfield Bank received approval from the FDIC to retain and acquire
such equity investments subject to a maximum permissible investment equal to
the lesser of 100% of Westfield Bank's Tier 1 capital or the maximum
permissible amount specified by the Massachusetts banking laws. Section 24
also provides an exception for majority owned
28
subsidiaries of a bank, but Section 24 limits the activities of such
subsidiaries to those permissible for a national bank, permissible under
Section 24 of the Federal Deposit Insurance Act and the related FDIC
regulations, or as approved by the FDIC.
Before making a new investment or engaging in a new activity that is
not permissible for a national bank or otherwise permissible under Section 24
of the FDIC regulations, an insured bank must seek approval from the FDIC to
make such investment or engage in such activity. The FDIC will not approve
the activity unless the bank meets its minimum capital requirements and the
FDIC determines that the activity does not present a significant risk to the
FDIC insurance funds. Certain activities of subsidiaries that are engaged in
activities permitted for national banks only through a "financial subsidiary"
are subject to additional restrictions.
Enforcement. The FDIC has extensive enforcement authority over insured
savings banks, including Westfield Bank. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue
cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of laws
and regulations and to unsafe or unsound practices.
The FDIC is required, with some exceptions, to appoint a receiver or
conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means
having a ratio of tangible capital to total assets of less than 2%. The FDIC
may also appoint a conservator or receiver for a state bank on the basis of
the institution's financial condition or upon the occurrence of certain
events.
Deposit Insurance. Pursuant to FDIC Improvement Act, the FDIC
established a system for setting deposit insurance premiums based upon the
risks a particular bank or savings association posed to its deposit insurance
funds. Under the risk-based deposit insurance assessment system, the FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending six
months before the assessment period. The three capital categories are
(1) well capitalized, (2) adequately capitalized and (3) undercapitalized.
With respect to the capital ratios, institutions are classified as well
capitalized, adequately capitalized or undercapitalized using ratios that are
substantially similar to the prompt corrective action capital ratios
discussed below. The FDIC also assigns an institution to supervisory subgroup
based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds, which may include information provided by the
institution's state supervisor.
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications, or
combinations of capital groups and supervisory subgroups, to which different
assessment rates are applied. Assessment rates for deposit insurance
currently range from 0 basis points to 27 basis points. The capital and
supervisory subgroup to which an institution is assigned by the FDIC is
confidential and may not be disclosed. A bank's rate of deposit insurance
assessments will depend upon the category and subcategory to which the bank
is assigned by the FDIC. Any increase in insurance assessments could have an
adverse effect on the earnings of insured institutions, including Westfield
Bank.
29
Under the Deposit Insurance Funds Act of 1996, the assessment base for
the payments on the bonds issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan
Insurance Corporation was expanded to include, beginning January 1, 1997, the
deposits of institutions insured by the Bank Insurance Fund, such as
Westfield Bank. The annual rate to fund the Financing Corporation bonds is
.0212%. These assessments will continue until the Financing Corporation bonds
mature in 2017.
Under the Federal Deposit Insurance Act, the FDIC may terminate the
insurance of an institution's deposits upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC. The management of
Westfield Bank does not know of any practice, condition or violation that
might lead to termination of deposit insurance.
Transactions with Affiliates of Westfield Bank. Transactions between an
insured bank, such as Westfield Bank, and any of its affiliates is governed
by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is
any company or entity that controls, is controlled by or is under common
control with the bank. Currently, a subsidiary of a bank that is not also a
depository institution is not treated as an affiliate of the bank for
purposes of Sections 23A and 23B, but the Federal Reserve Board has proposed
a comprehensive regulation implementing Sections 23A and 23B, which would
establish certain exceptions to this policy.
Section 23A:
* limits the extent to which the bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such bank's capital stock and retained
earnings, and limit on all such transactions with all affiliates
to an amount equal to 20% of such capital stock and retained
earnings; and
* requires that all such transactions be on terms that are
consistent with safe and sound banking practices.
The term "covered transaction" includes the making of loans, purchase
of assets, issuance of guarantees and other similar types of transactions.
Further, most loans by a bank to any of its affiliates must be secured by
collateral in amounts ranging from 100 to 130 percent of the loan amounts. In
addition, any covered transaction by a bank with an affiliate and any
purchase of assets or services by a bank from an affiliate must be on terms
that are substantially the same, or at least as favorable to the bank, as
those that would be provided to a non-affiliate.
Prohibitions Against Tying Arrangements. Banks are subject to the
prohibitions of 12 U.S.C. [SECTION] 1972 on certain tying arrangements. A
depository institution is prohibited, subject to some exceptions, from
extending credit to or offering any other service, or fixing or varying the
consideration for such extension of credit or service, on the condition that
the customer obtain some additional service from the institution or its
affiliates or not obtain services of a competitor of the institution.
30
Community Reinvestment Act. Under the Community Reinvestment Act, any
insured depository institution, including Westfield Bank, has a continuing
and affirmative obligation consistent with its safe and sound operation to
help meet the credit needs of its entire community, including low and
moderate income neighborhoods. The Community Reinvestment Act does not
establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the
types of products and services that it believes are best suited to its
particular community.
The Community Reinvestment Act requires the FDIC, in connection with
its examination of a savings bank, to assess the depository institution's
record of meeting the credit needs of its community and to take such record
into account in its evaluation of certain applications by such institution,
including applications for additional branches and acquisitions.The Community
Reinvestment Act requires the FDIC to provide a written evaluation of an
institution's Community Reinvestment Act performance utilizing a four-tiered
descriptive rating system and requires public disclosure of an institution's
Community Reinvestment Act rating. Westfield Bank received a "satisfactory"
rating in its Community Reinvestment Act examination conducted by the FDIC
on December 14, 1998.
Safety and Soundness Standards. Pursuant to the requirements of FDIC
Improvement Act, as amended by the Riegle Community Development and
Regulatory Improvement Act of 1994, each federal banking agency, including
the FDIC, has adopted guidelines establishing general standards relating to
internal controls, information and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
asset quality, earnings, and compensation, fees and benefits. In general, the
guidelines require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. The
guidelines prohibit excessive compensation as an unsafe and unsound practice
and describe compensation as excessive when the amounts paid are unreasonable
or disproportionate to the services performed by an executive officer,
employee, director, or principal stockholder.
In addition, the FDIC adopted regulations to require a bank that is
given notice by the FDIC that it is not satisfying any of such safety and
soundness standards to submit a compliance plan to the FDIC. If, after being
so notified, a bank fails to submit an acceptable compliance plan or fails in
any material respect to implement an accepted compliance plan, the FDIC may
issue an order directing corrective and other actions of the types to which a
significantly undercapitalized institution is subject under the "prompt
corrective action" provisions of FDIC Improvement Act. If a bank fails to
comply with such an order, the FDIC may seek to enforce such an order in
judicial proceedings and to impose civil monetary penalties.
Prompt Corrective Action. The FDIC Improvement Act also established a
system of prompt corrective action to resolve the problems of
undercapitalized institutions. The FDIC, as well as the other federal banking
regulators, adopted regulations governing the supervisory actions that may be
taken against undercapitalized institutions. The regulations establish five
categories, consisting of "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized."
31
Federal Reserve System
Under Federal Reserve Board regulations, Westfield Bank is required to
maintain noninterest-earning reserves against its transaction accounts. The
Federal Reserve Board regulations generally require that reserves of 3% must
be maintained against aggregate transaction accounts of $37.3 million or
less, subject to adjustment by the Federal Reserve Board, and an initial
reserve of $1.284 million plus 10%, subject to adjustment by the Federal
Reserve Board between 8% and 14%, against that portion of total transaction
accounts in excess of $42.8 million. The first $5.5 million of otherwise
reservable balances, subject to adjustments by the Federal Reserve Board, are
exempted from the reserve requirements. Westfield Bank is in compliance with
these requirements. Because required reserves must be maintained in the form
of either vault cash, a noninterest-bearing account at a Federal Reserve Bank
or a pass-through account as defined by the Federal Reserve Board, the effect
of this reserve requirement is to reduce Westfield Bank's interest-earning
assets.
Holding Company Regulation
Federal Regulation. As a bank holding company, Westfield Financial is
required to obtain the prior approval of the Federal Reserve Board to acquire
all, or substantially all, of the assets of any bank or bank holding company.
Prior Federal Reserve Board approval will be required for Westfield Financial
to acquire direct or indirect ownership or control of any voting securities
of any bank or bank holding company if, after giving effect to such
acquisition, it would, directly or indirectly, own or control more than 5% of
any class of voting shares of such bank or bank holding company.
A bank holding company is required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or
redemptions during the preceding 12 months, will be equal to 10% or more of
the company's consolidated net worth. The Federal Reserve Board may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe and unsound practice, or would violate any law,
regulation, Federal Reserve Board order or directive, or any condition
imposed by, or written agreement with, the Federal Reserve Board. Such notice
and approval is not required for a bank holding company that would be treated
as "well capitalized" under applicable regulations of the Federal Reserve
Board, that has received a composite "1" or "2" rating at its most recent
bank holding company inspection by the Federal Reserve Board, and that is not
the subject of any unresolved supervisory issues.
In addition, a bank holding company which does not qualify as a
financial holding company under the Gramm-Leach-Bliley Financial Services
Modernization Act, is generally prohibited from engaging in, or acquiring
direct or indirect control of any company engaged in non-banking activities.
One of the principal exceptions to this prohibition is for activities found
by the Federal Reserve Board to be so closely related to banking or managing
or controlling banks as to be permissible.
Bank holding companies that do qualify as a financial holding company
may engage in activities that are financial in nature or incident to
activities which are financial in nature. Bank
32
holding companies may qualify to become a financial holding company if it
meets certain criteria set forth by the Federal Reserve Board.
Under the Federal Deposit Insurance Act, depository institutions are
liable to the FDIC for losses suffered or anticipated by the FDIC in
connection with the default of a commonly controlled depository institution
or any assistance provided by the FDIC to such an institution in danger of
default. This law would potentially be applicable to Westfield Mutual Holding
Company or Westfield Financial if it ever acquired as a separate subsidiary a
depository institution in addition to Westfield Bank.
Massachusetts Regulation
Under the Massachusetts banking laws, a company owning or controlling
two or more banking institutions, including a savings bank, is regulated as a
bank holding company. The term "company" is defined by the Massachusetts
banking laws similarly to the definition of "company" under the Bank Holding
Company Act. Each Massachusetts bank holding company:
* must obtain the approval of the Massachusetts Board of Bank
Incorporation before engaging in certain transactions, such as
the acquisition of more than 5% of the voting stock of another
banking institution;
* must register, and file reports, with the Division; and
* is subject to examination by the Division.
Westfield Mutual Holding Company or Westfield Financial will become a
Massachusetts bank holding company if they acquire a second banking
institution and hold and operate it separately from Westfield Bank.
Acquisition of Westfield Financial or Westfield Bank
Federal Restrictions. Under the federal Change in Bank Control Act, any
person (including a company), or group acting in concert, seeking to acquire
10% or more of the outstanding shares of Westfield Financial's common stock
will be required to submit prior notice to the Federal Reserve Board, unless
the Federal Reserve Board has found that the acquisition of such shares will
not result in a change in control of Westfield Financial. Under the Change in
Bank Control Act, the Federal Reserve Board has 60 days within which to act
on such notices, taking into consideration factors, including the financial
and managerial resources of the acquiror, the convenience and needs of the
communities served by Westfield Financial and Westfield Bank, and the anti-
trust effects of the acquisition. Under the Bank Holding Company Act, any
company would be required to obtain prior approval from the Federal Reserve
Board before it may obtain "control," within the meaning of the Bank Holding
Company Act, of Westfield Financial. The term "control" is defined generally
under the Bank Holding Company Act to mean the ownership or power to vote 25%
more of any class of voting securities of an institution or the ability to
control in any manner the election of a majority of the institution's
directors. An existing bank holding company would require FRB approval prior
to acquiring more than 5% of any class of voting stock of Westfield
Financial.
33
Massachusetts Restrictions. Under the Massachusetts banking laws, the
prior approval of the Division is required before any person may acquire a
Massachusetts bank holding company. For this purpose, the term "person" is
defined broadly to mean a natural person or a corporation, company,
partnership, or other forms of organized entities. The term "acquire" is
defined differently for an existing bank holding company and for other
companies or persons. A bank holding company will be treated as "acquiring" a
Massachusetts bank holding company if the bank holding company acquires more
than 5% of any class of the voting shares of the bank holding company. Any
other person will be treated as "acquiring" a Massachusetts bank holding
company if it acquires ownership or control of more than 25% of any class of
the voting shares of the bank holding company.
Federal Securities Law
Our common stock is registered with the Securities and Exchange
Commission under Section 12(b) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). We are subject to information, proxy
solicitation, insider trading restrictions, and other requirements under the
Exchange Act.
34
ITEM 2. PROPERTIES
Properties
Westfield Bank currently conducts its business through its 10 banking
offices and two off-site ATMs. As of December 31, 2001, the properties and
leasehold improvements owned by us had an aggregate net book value of $13.6
million.
Year of Lease
or License Deposits as of
Location Ownership Year Opened Expiration December 31, 2001
- ------------------------------------------------------------------------------------------
(In thousands)
<s> <c> <c> <c> <c>
Main Office:
141 Elm St Owned 1964 N/A $212,623
Westfield, MA
Branch Offices:
206 Park St Owned 1957 N/A 124,917
W. Springfield, MA
655 Main St. Owned 1968 N/A 132,363
Agawam, MA
26 Arnold St. Owned 1976 N/A 2,247
Westfield, MA
300 Southampton Rd. Owned 1987 N/A 45,396
Westfield, MA
462 College Highway Owned 1990 N/A 35,704
Southwick, MA
382 N. Main St. Leased 1997 2007(1) 55,161
E. Longmeadow, MA
1341 Main St. Leased 1999 2003(2) 19,418
Springfield, MA
1642 Northampton St. Owned 2001 N/A 5,026
Holyoke, MA
1342 Liberty St. Owned 2001 N/A 4,254
Springfield, MA
ATMs:
337 N. Westfield St. Owned 1988 N/A N/A
Feeding Hills, MA
830 Suffield St. Leased 1997 2002 N/A
Agawam, MA
<FN>
- --------------------
<F1> Does not include two additional five-year options.
<F2> Does not include three additional five-year options.
</FN>
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any pending legal proceeding other than routine
legal proceedings occurring in the ordinary course of business. None of
which, in the opinion of management, will have a material effect on the
company's consolidated financial position or results of operations.
35
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is listed on The American Stock Exchange under the
symbol "WFD." Westfield Mutual Holding Company owns 5,607,400 shares, or 53%
of our outstanding common stock. At December 27, 2001, there were 10,580,000
shares of common stock issued and outstanding, and there were approximately
2,364 holders of record. The price range for the common stock for the period
from the issue date of December 27, 2001 to December 31, 2001 was as follows:
Period Low Dividend High
- ------ --- -------- ----
<s> <c> <c> <c>
December 27, 2001 - December 31, 2001 $10.00 - $13.880
The stock price information set forth above has been provided by The
American Stock Exchange. High, low, and closing prices and daily trading
volumes are reported in most major newspapers.
We intend to pay quarterly cash dividends on our common stock beginning
the quarter ended March 31, 2002 at an initial annualized rate of $0.20 per
share. The continued payment of dividends also depend upon our debt and
equity structure, earnings, financial condition, need for capital in
connection with possible future acquisitions and other factors, including
economic conditions, regulatory restrictions and tax considerations. We
cannot guarantee that we will pay dividends or that, if paid, that we will
not reduce or eliminate dividends in the future.
The only funds available for the payment of dividends on the capital
stock of Westfield Financial will be cash and cash equivalents held by
Westfield Financial, dividends paid by Westfield Bank to Westfield Financial,
and borrowings. Westfield Bank will be prohibited from paying cash dividends
to Westfield Financial to the extent that any such payment would reduce
Westfield Bank's capital below required capital levels or would impair the
liquidation account to be established for the benefit of the Westfield Bank's
eligible account holders and supplemental eligible account holders at the
time of the reorganization and stock offering.
36
ITEM 6. SELECTED FINANCIAL DATA
The summary information presented below at or for each of the years
presented is derived in part from the consolidated financial statements of
Westfield Financial. The following information is only a summary, and you
should read it in conjunction with our consolidated financial statements and
notes beginning on page F-1.
At December 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------
(In thousands)
--------------------------------------------------------
<s> <c> <c> <c> <c> <c>
Selected Financial Condition Data:
Total assets $782,732 $694,791 $638,563 $582,551 $549,407
Loans, net(1) 413,546 464,531 467,444 415,084 385,136
Securities available for sale 74,184 75,709 53,164 51,570 57,932
Securities held to maturity 45,614 39,461 44,239 40,719 40,379
Mortgage backed securities
available for sale 87,150 52,580 23,568 20,643 16,658
Mortgage backed securities held
to maturity 81,007 6,806 4,507 6,698 8,669
Deposits 637,109 601,896 551,024 508,313 482,968
Customer repurchase agreements 6,061 7,686 3,274 - -
Federal Home Loan Bank advances - - 5,000 - -
Total equity 131,317 77,755 71,245 66,672 60,468
Allowance for loan losses 3,923 3,434 3,118 2,632 2,791
Nonperforming loans 2,684 2,308 2,751 838 939
For the Years Ended
--------------------------------------------------------
December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands)
--------------------------------------------------------
Selected Operating Data:
Interest and dividend income $ 47,543 $ 46,718 $ 41,850 $ 40,784 $ 8,298
Interest expense 25,002 24,535 21,151 21,288 20,144
--------------------------------------------------------
Net interest and dividend income 22,541 22,183 20,699 19,496 18,154
Provision for loan losses 1,630 1,089 843 293 200
--------------------------------------------------------
Net interest and dividend income after
provision for loan losses 20,911 21,094 19,856 19,203 17,954
Total noninterest income 2,517 2,855 1,555 1,203 1,042
Total noninterest expense 15,899 14,684 12,986 12,232 10,125
--------------------------------------------------------
Income before income taxes 7,529 9,265 8,425 8,174 8,871
Income taxes 2,512 3,185 2,898 3,062 3,542
--------------------------------------------------------
Net income. $ 5,017 $ 6,080 $ 5,527 $ 5,112 $ 5,329
========================================================
<FN>
- --------------------
<F1> Loans are shown net of deferred loan fees, allowance for loan losses
and unadvanced loan funds.
</FN>
37
At or for the Years Ended December 31,
-------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
<s> <c> <c> <c> <c> <c>
Selected Financial Ratios and
Other Data(1)
Performance Ratios:
Return on average assets 0.70% 0.92% 0.91% 0.90% 1.02%
Return on average equity 6.16 8.04 7.95 7.90 9.12
Average equity to average assets 11.32 11.45 11.50 11.45 11.13
Equity to total assets at end of period 16.78 11.19 11.16 11.44 11.01
Average interest rate spread 2.80 2.95 3.13 3.18 3.00
Net interest margin(2) 3.36 3.53 3.62 3.66 3.61
Average interest earning assets to average
interest earning liabilities 115.00 114.73 113.67 112.09 113.40
Total noninterest expense to
average assets 2.21 2.22 2.15 2.16 1.93
Efficiency ratio(3) 65.62 62.48 59.74 59.88 52.61
Regulatory Capital Ratios:
Regulatory tier 1 leverage capital 17.27 11.51 11.11 11.16 11.44
Tier 1 risk-based capital 28.09 16.33 16.28 16.88 16.32
Total risk-based capital 28.98 17.24 17.32 17.59 17.05
Asset Quality Ratios:
Nonperforming loans as a percent
of total loans 0.64 0.49 0.58 0.20 0.24
Nonperforming assets as a percent
of total assets 0.37 0.33 0.43 0.18 0.35
Allowance for loan losses as a percent
of total loans 0.94 0.73 0.66 0.63 0.72
Allowance for loan losses as a percent
of nonperforming assets 137 149 113 249 145
Number of:
Banking offices 10 8 8 7 7
Full-time equivalent employees 159 151 150 137 163
<FN>
- --------------------
<F1> Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios.
<F2> Net interest margin represents net interest and dividend income as a
percentage of average interest earning assets.
<F3> The efficiency ratio represents the ratio of operating expenses divided
by the sum of net interest and dividend income and noninterest income
less gain on sale of securities.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Westfield Financial's consolidated results of operations are comprised
of earnings on investments and the net income recorded by its principal
operating subsidiary, Westfield Bank. Westfield Bank's consolidated results
of operations depend primarily on net interest income. Net interest and
dividend income is the difference between the interest income earned on
interest-earning assets and the interest paid on interest-bearing
liabilities. Interest-earning assets consist primarily of residential
mortgage loans, commercial mortgage loans, commercial loans, consumer loans,
mortgage-backed securities and investment securities. Interest-bearing
liabilities consist primarily of certificates of deposit, savings and money
market and NOW account deposits, and borrowings from the Federal Home Loan
Bank of Boston. The consolidated results of operations also depend on
provision for loan losses, noninterest income, and noninterest expense.
Noninterest expense includes salaries and employee benefits, occupancy
expenses and other general and administrative expenses. Noninterest income
includes gains on sales of securities and service fees and charges.
38
The consolidated results of operations may also be affected
significantly by economic and competitive conditions in the market area and
elsewhere, including those conditions that influence market interest rates,
government policies and the actions of regulatory authorities. Future changes
in applicable laws, regulations or government policies may materially affect
the results of operations. Furthermore, because Westfield Bank's lending
activity is concentrated in loans secured by residential and commercial real
estate located in Hampden County, Massachusetts, downturns in this regional
economy could have a negative impact on its earnings.
Management Strategy
Westfield Bank strives to remain a leader in meeting the financial
service needs of the local community and to provide quality service to the
individuals and businesses in the market areas that it has served since 1853.
Historically, Westfield Bank has been a community-oriented provider of
traditional banking products and services to business organizations and
individuals, including products such as residential and commercial real
estate loans, consumer loans and a variety of deposit products.
In recent years, in addition to real estate lending, we have adopted a
growth-oriented strategy that has focused on increased emphasis on commercial
and consumer lending and deposit relationships, extending our branch network
and broadening our product lines and services. We believe that this business
strategy is best for our long term success and viability, and complements our
existing commitment to high quality customer service. In connection with our
overall growth strategy, Westfield Bank seeks to:
* increase lending to support the continued growth of its
commercial loan portfolio as a means to increase the yield on and
diversify its loan portfolio and build transactional deposit
account relationships;
* continue to focus on consumer lending as a means of diversifying
its loan portfolio;
* continue to focus on expanding its retail banking franchise, and
increasing the number of households served within its market
area;
* depending on market conditions, sell substantially all of the
fixed-rate residential real estate loans that it originates and
invest the proceeds of these sales in commercial and industrial
loans, consumer loans, commercial real estate loans and
investment securities in order to diversify its loan portfolio
and reduce interest rate risk;
* maintain its capital strength and asset quality; and
* meet the needs of its local community through a community-based
and service-orientated approach to banking.
Westfield Bank intends to utilize proceeds from the stock offering to
further the objectives of its growth-oriented strategy. Westfield Bank may
also use the offering proceeds to acquire branches from other banks or to
make other acquisitions.
39
Average Balance Sheet and Analysis of Net Interest and Dividend Income
The following tables set forth information relating to our financial
condition and net interest and dividend income for the years ended December
31, 2001, 2000 and 1999 and reflect the average yield on assets and average
cost of liabilities for the periods indicated. The yields and costs were
derived by dividing income or expense by the average balance of interest-
earning assets or interest-bearing liabilities, respectively, for the periods
shown. Average balances were derived from actual daily balances over the
periods indicated. Interest income includes fees earned from making changes
in loan rates or terms, and fees earned when commercial real estate loans
were prepaid or refinanced.
For the Year Ended December 31,
---------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------- ----------------------------- ------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- ------- ------- -------- --------
(Dollars in thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Assets:
Interest-earning assets:
Short term investments(1) $ 17,893 $ 562 3.14% $ 10,570 $ 663 6.28% $ 7,370 $ 361 4.90%
Securities 212,340 13,190 6.21 154,245 9,971 6.47 122,709 7,585 6.18
Loans(2) 441,381 33,791 7.66 464,011 36,084 7.77 443,901 33,904 7.67
------------------ ------------------ ------------------
Total interest-earning
assets 671,614 47,543 7.08 628,826 46,718 7.43 573,980 41,850 7.32
------- ------- -------
Total noninterest-earning
assets 48,000 31,345 30,770
-------- -------- --------
Total assets $719,614 $660,171 $604,750
======== ======== ========
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts 35,738 770 2.15% 35,071 837 2.38 31,887 748 2.35
Regular savings accounts 43,965 523 1.19 48,835 509 1.04 53,520 1,101 2.06
Money market deposit accounts 123,085 3,670 2.98 110,051 3,834 3.48 117,331 3,852 3.28
Time certificates of deposit
accounts 374,100 19,767 5.28 346,027 18,907 5.46 300,341 15,359 5.11
------------------ ------------------ ------------------
Total interest-bearing
deposits 576,888 24,730 4.29 539,984 24,087 4.46 503,079 21,060 4.19
Customer repurchase agreements
and other borrowings 7,199 272 3.78 8,096 448 5.53 1,875 91 4.85
------------------ ------------------ ------------------
Total interest-bearing
liabilities 584,087 25,002 4.28 548,080 24,535 4.48 504,954 21,151 4.19
------------------ ------------------ ------------------
Noninterest-bearing deposits 38,737 31,826 25,504
Other noninterest-bearing
liabilities 15,324 4,662 4,728
-------- -------- --------
Total noninterest-bearing
liabilities 54,061 36,488 30,232
-------- -------- --------
Total liabilities 638,148 584,568 535,186
Total equity 81,466 75,603 69,564
-------- -------- --------
Total liabilities and equity $719,614 $660,171 $604,750
======== ======== ========
Net interest and dividend
income $22,541 $22,183 $20,699
======= ======= =======
Net interest rate spread(3) 2.80 2.95 3.13
Net interest margin(4) 3.36% 3.53% 3.62%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 115.0x 114.73x 113.67x
<FN>
- --------------------
<F1> Short term investments include Federal Funds Sold
<F2> Loans, including non-accrual loans, are net of deferred loan
origination costs (fees), allowance for loan losses and unadvanced
funds.
<F3> Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities.
<F4> Net interest margin represents net interest and dividend income as a
percentage of average interest earning assets.
</FN>
40
Rate/Volume Analysis. The following table shows how changes in interest
rates and changes in the volume of interest-earning assets and interest-
bearing liabilities have affected our interest and dividend income and
interest expense during the periods indicated. Information is provided in
each category with respect to:
(1) interest income changes attributable to changes in volume
(changes in volume multiplied by prior rate);
(2) interest income changes attributable to changes in rate (changes
in rate multiplied by prior volume); and
(3) the net change.
The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes
due to rate.
Year Ended December 31, 2001 December 31, 2000 Year Ended
Compared to Year Ended Compared to Year Ended
December 31, 2000 December 31, 1999
Increase/(Decrease) Increase/(Decrease)
------------------------------------------------------------------
Due to Due to
------------------- ------------------
Volume Rate Net Volume Rate Net
----------------------------- --------------------------
(In Thousands)
<s> <c> <c> <c> <c> <c> <c>
Interest earning assets:
Short term investments $ 459 $ (560) $ (101) $ 200 $ 102 $ 302
Investment securities 3,755 (536) 3,219 2,040 346 2,386
Loans (1,760) (533) (2,293) 1,715 465 2,180
------------------------------------------------------------------
Total interest-earning assets $ 2,454 $(1,629) $ 825 $ 3,955 $ 913 $4,868
==================================================================
Interest bearing liabilities:
NOW accounts $ 16 $ (83) $ (67) $ 76 $ 13 $ 89
Savings accounts (51) 65 14 (49) (543) (592)
Money market deposit accounts 454 (618) (164) (253) 235 (18)
Time certificates of deposit 1,534 (674) 860 2,494 1,054 3,548
Customer repurchase agreements
and other borrowings (50) (126) (176) 344 13 357
------------------------------------------------------------------
Total interest bearing
liabilities 1,903 (1,436) 467 2,612 772 3,384
------------------------------------------------------------------
Change in net interest and
dividend income $ 551 $ (193) $ 358 $ 1,343 $ 141 $1,484
==================================================================
Comparison of Financial Condition at December 31, 2001 and December 31, 2000
The consolidated assets increased $ 87.9 million, or 12.7%, to $782.7
million at December 31, 2001 from $694.8 million at December 31, 2000.
Securities increased $113.4 million, or 65%, to $288.0 million at December
31, 2001 from $174.6 million at December 31, 2000. Federal Funds sold
increased $24.2 million to $ 34.3 million at December 31, 2001 from $10.0
million at December 31, 2000. Westfield Bank securitized $35.7 million in
thirty-year fixed rate residential mortgage loans and $24.6 million in
fifteen year fixed rate residential mortgage loans with Fannie Mae. This
transaction was done to reduce interest rate risk as well as improve
liquidity and enhance the subsequent saleability of the resulting securities.
Because the dollar value of the securitized loans equaled the value of the
underlying loans, the securitization
41
did not result in a material change in total assets. Commercial and
industrial loans increased $9.5 million, or 25.3 % for the year ended
December 31, 2001.
Asset growth was funded primarily by an increase in deposits of $35.2
million or 5.9% to $637.1 million at December 31, 2001 from $601.9 million at
December 31, 2000 and funds raised in the initial public offering of
Westfield Financial's common stock completed on December 27, 2001. Interest-
bearing deposits accounted for $25.5 million of the growth in total deposits,
while demand deposits accounted for $9.7 million.
Customer repurchase agreements decreased $1.6 million or 21.1% to $6.1
million at December 31, 2001 from $7.7 million at December 31, 2000. A
"customer repurchase agreement" is an agreement by Westfield Bank to sell to
and repurchase from the customer an interest in specific securities issued by
or guaranteed by the United States Government. This transaction settles
immediately on a same day basis in immediately available funds. Interest paid
is commensurate with other products of equal interest and credit risk.
Total equity increased $53.6 million, or 68.9%, to $131.3 million at
December 31, 2001 from $77.8 million at December 31, 2000. The increase was
primarily attributable to funds raised in the initial public offering of the
Westfield Financial's common stock, net income for the year ended December
31, 2001 and an increase in unrealized gains on investment securities
available for sale of $816,000 for the year ended December 31, 2001.
Comparison of Operating Results for the Year Ended December 31, 2001 and
December 31, 2000.
General
Net income was $5.0 million for the year ended December 31, 2001 a
decrease of $1.1 million, or 17.5%, compared with net income of $6.1 million
for the year ended December 31, 2000. The decrease was primarily attributable
to a decrease in gains on sales of securities of $705,000 from $1.5 million
in 2000 to $830,000 in year 2001, and an increase in provision for loan
losses of $541,000. Noninterest expense increased $1.2 million, while federal
and state income taxes decreased $673,000 and net interest and dividend
income increased $358,000 compared with the prior year.
Interest and Dividend Income
Total interest and dividend income increased $825,000 or 1.8% to $47.5
million for the year ended December 31, 2001 compared with $46.7 million for
the same period in 2000. Interest and dividends on securities increased $3.0
million to $12.2 million from $9.2 million, while interest income on loans
decreased $2.3 million. The average balance of interest earning assets
increased $42.8 million, or 6.8%, however the yield on earning assets
decreased from 7.43% in 2000 to 7.08% for 2001.
Interest Expense
Interest expense increased $467,000 or 1.9%, to $25.0 million for the
2001 compared with $24.5 million for 2000. The average balance of total
interest - bearing deposits increased
42
$36.9 million in 2001 to $576.9 million, while the average cost of deposits
decreased 17 basis points to 4.29%. The average balance of customer
repurchase agreements decreased $897,000 from $8.1 million in 2000 to $7.2
million in 2001.
Net Interest and Dividend Income
Net interest and dividend income for 2001 was $22.5 million as compared
with $22.2 million for 2000. Net interest rate spread decreased to 2.80% for
2001 from 2.95% for the prior year. Net interest margin decreased to 3.36%
for 2001 compared with 3.53% for 2000. The decrease in interest rate spread
and net interest margin was primarily the result of the increase in the cost
of certificates of deposit.
Provision for Loan Losses
During 2001, Westfield Bank provided $1.6 million for loans losses,
compared to $1.1 million for 2000. The provision for loan losses brings
Westfield Bank's allowance for loan losses to a level determined appropriate
by management based on the methodology discussed under "Allowance for Loan
Losses". The allocation of the provision among loan types and between the
specific and formula components of the allowance for loan losses is also
determined based on the methodology discussed under "Allowance for Loan
Losses". The following factors resulted in an increase in the provision for
2001 as compared to 2000.
* Loan concentrations - Commercial real estate loans and commercial
and industrial loans increased $16.1 million or 12.4%. Westfield
Bank considers these types of loans to contain more risk than
conventional residential mortgages which remained relatively
constant. These increases resulted in an increase in the
allowance requirements for commercial real estate and commercial
and industrial loans. These increases were partially offset by a
decrease in consumer loans from $73.3 million at December 31,
2000 to $58.1 million at December 31, 2001, resulting in a
decrease in the allowance requirement for consumer loans.
* Credit quality - Actual loss experience on loans increased
significantly with charge-offs totaling $1.8 million in 2001 as
compared to $1.1 million in 2000. Net loans charged off as a
percent of average loans outstanding increased from 0.17% to
0.26% in 2001. Non-accrual loans increased $376,000 from $2.3
million at December 31, 2000 to $2.7 million at December 31,
2001. The increases in charge-offs and non-accrual loans
increases the loss factors applied to outstanding loans and
results in an increase in the allowance requirement.
As a result of the detailed allowance for loan loss methodology and
consideration of the above factors, management determined that an increase in
the provision of $541,000 was appropriate.
The allowance for loan losses at the end of 2001 was 0.94% of total
loans compared with 0.73% at the end of 2000. The increase in the coverage
ratio reflects the changes in the loan portfolio described above.
43
Noninterest Income
Noninterest income decreased $338,000 to $2.5 million in 2001 from $2.9
million for 2000. Security gains were $830,000 for 2001, down from $1.5
million in 2000. Included in noninterest income in the year 2001 were life
insurance proceeds of $300,000 collected in November of that year.
Noninterest Expense
Total noninterest expense increased $1.2 million, or 8.3%, to $15.9
million in 2001 compared with $14.7 million for the prior year. Salaries and
benefits expense represented $545,000 or 44.9% of the increase. In June 2001,
Westfield Bank increased its staffing levels in order to open two new full
service branches. These two new branches were also the reason for the
$366,000 increase in occupancy expense. In May of 2001, Westfield Bank
converted its data processing to a new core system, which accounted for the
$400,000 increase in computer operating expense.
Income Taxes
Income taxes decreased $673,000, or 21.1%, to $2.5 million in 2001. The
effective tax rate was 33.4% in 2001 compared to 34.4% for 2000. The
effective tax rate also reflects the utilization of Westfield Securities
Corporation, a qualified securities corporation, and Elm Street Real Estate
Investments, Inc., a wholly-owned subsidiary of Westfield Bank, as a real
estate investment trust.
Comparison of Financial Condition at December 31, 2000 and 1999
The consolidated assets increased $56.2 million, or 8.8%, to $694.8
million at December 31, 2000 from $638.6 million at December 31, 1999.
Investment securities increased $49.1 million, or 39.1%, to $174.6 million at
December 31, 2000 from $125.5 million at December 31, 1999. Federal funds
sold increased from $2.6 million at December 31, 1999 to $10.0 million at
December 31, 2000. Commercial and industrial loans increased $4.8 million
from $32.7 million to $37.5 million at December 31, 2000 and 1999
respectively.
Asset growth was funded primarily by an increase of $50.9 million in
deposits, to $601.9 million at December 31, 2000 compared to $551.0 million
at December 31, 1999. Time certificates of deposit increased $49.2 million
from $323.6 million at December 31, 1999 to $372.8 million at December 31,
2000. Demand deposits also showed significant growth of $8.9 million, or
30.1%, to $38.5 million at December 31, 2000 from $29.6 million at December
31, 1999.
At December 31, 1999, Westfield Bank had $5.0 million in borrowings
from the Federal Home Loan Bank as a method of funding perceived cash needs
as a result of Y2K. There were no borrowings at December 31, 2000.
Customer repurchase agreements increased $4.4 million, or 134.8%, from
$3.3 million to $7.7 million at December 31, 1999 and 2000 respectively.
44
Total equity increased $6.5 million, or 9.1% to $77.8 million at
December 31, 2000 from $71.2 million at December 31, 1999. This was primarily
the result of net income of $6.1 million and an increase in unrealized gains
on investment securities available for sale of $430,000 for the year ended
December 31, 2000.
Comparison of Operating Results for the Years Ended December 31, 2000 and
1999
General
Net income of $6.1 million for 2000 represents a $553,000, or 10.0%,
increase from 1999 earnings of $5.5 million. This increase was due primarily
to the growth in securities of $49.1 million and an increase in commercial
and industrial loans of $4.8 million, or 14.8%, from $32.7 million in 1999 to
$37.5 million in 2000.
Interest and Dividend Income
Total interest and dividend income increased $4.9 million to $46.7
million for 2000 compared to $41.9 million for 1999. The average balance of
interest earning assets increased $54.8 million, or 9.6%, and the yield on
earning assets increased from 7.32% in 1999 to 7.43% for 2000.
Interest and dividend income increased primarily due to the previously
mentioned growth in securities. Interest and dividends on investment
securities increased $2.4 million, or 33.4%, from $7.2 million in 1999 to
$9.6 million in 2000. The yield on investment securities also increased
substantially from 6.18% in 1999 to 6.47% in 2000.
Interest Expense
Interest expense increased $3.4 million, or 16.0%, to $24.5 million for
2000 compared with $21.2 million for 1999. The average balance of total
interest-bearing deposits increased $36.9 million in 2000 to $540.0 million,
while the average cost of deposits increased 27 basis points to 4.46%. The
combination of the deposit growth and the increase in cost of funds produced
a $3.4 million increase in interest expense for the year. The average balance
of borrowed funds increased in 2000 by $6.2 million and the average cost of
borrowings increased 73 basis points to 5.53% in 2000. The customer
repurchase agreements produced an increase in interest expense of
approximately $279,000 compared with 1999.
Net Interest and Dividend Income
Net interest and dividend income for 2000 was $22.2 million as compared
with $20.7 million for 1999. Net interest rate spread decreased to 2.95% for
2000 from 3.13% for the prior year. Net interest margin decreased to 3.53%
for 2000 compared with 3.62% for 1999. The decrease in net interest income is
primarily the result of the increase in higher cost certificates of deposit.
45
Provision for Loan Losses
During 2000, Westfield Bank provided $1.1 million for loans losses,
compared to $843,000 for 1999. The provision for loan losses brings Westfield
Bank's allowance for loan losses to a level deemed appropriate by management
based on the methodology discussed under "Allowance for Loan Losses." The
allocation of the provision among loan types and between the specific and
formula components of the allowance for losses is also determined based on
the methodology discussed under "Allowance for Loan Losses." The following
factors resulted in an increase in the provision for 2000 as compared to
1999:
* Loan concentrations - Commercial real estate loans and commercial
and industrial loans increased $8.3 million or 6.8%. Westfield
Bank considers these types of loans to contain more risk than
conventional residential mortgages which remained relatively
constant. These increases resulted in an increase in the
allowance requirements for commercial real estate and commercial
and industrial loans. These increases were partially offset by a
decrease in consumer loans from $83.4 million at December 31,
1999 to $73.3 million at December 31, 2000 resulting in a
decrease in the allowance requirement for consumer loans.
* Credit quality - Actual loss experience on loans increased
significantly with charge-offs totaling $1.1 million in 2000 as
compared to $545,000 in 1999. Net loans charged off as a percent
of average loans outstanding increased from 0.08% to 0.17% in
2000. This increase was partially offset by a decrease in non-
accrual loans from $2.8 million at December 31, 1999 to $2.3
million at December 31, 2000. The increase in charge-offs
increases the loss factors applied to outstanding loans and
results in an increase in the allowance requirement.
As a result of the detailed allowance for loan loss methodology and
consideration of the above factors, management determined that an increase in
the provision of $246,000 was appropriate.
The allowance for loan losses at the end of 2000 was 0.73% of total
loans compared with 0.66% at the end of 1999. The increase in the coverage
ratio reflects the changes in the loan portfolio described above.
Noninterest Income
Noninterest income increased to $2.9 million in 2000 compared with $1.6
million the year before. Security gains were $1.5 million in 2000, up from
$515,000 in 1999. The gains in 2000 were primarily from the sale of common
stock holdings.
Noninterest Expense
Total noninterest expense increased $1.7 million, or 13.1%, to $14.7
million in 2000 compared with $13.0 million for the prior year. Salaries and
benefits expense represented $877,000 of the increase. In July 1999,
Westfield Bank increased its staffing levels in order to open its branch
office on Main Street in Springfield, Massachusetts. Other noninterest
expense increased $526,000 mainly as the result of a loss due to a check
kiting scheme by one of its
46
customers. Occupancy expense increased by $224,000 as a result of Westfield
Bank's main office expansion and the opening of the above mentioned
Springfield, Massachusetts office.
Income Taxes
Income taxes increased $287,000, or 9.9%, to $3.2 million in 2000. The
effective tax rate was 34.4% in 2000 and 1999. The effective tax rate also
reflects the utilization of Westfield Mutual Holding Company as a qualified
securities corporation and Elm Street Real Estate Investments, Inc., a
wholly-owned subsidiary of Westfield Bank, as a real estate investment trust.
Liquidity and Capital Resources
The term "liquidity" refers to our ability to generate adequate amounts
of cash to fund loan originations, loan purchases, deposit withdrawals and
operating expenses. Our primary sources of liquidity are deposits, scheduled
amortization and prepayments of loan principal and mortgage-backed
securities, maturities and calls of investment securities and funds provided
by our operations. Westfield Bank also can borrow funds from the Federal Home
Loan Bank based on eligible collateral of loans and securities. At December
31, 2001, Westfield Bank's maximum borrowing capacity from the Federal Home
Loan Bank is approximately $148.1 million, net of any outstanding borrowings.
In addition, we may enter into reverse repurchase agreements with approved
broker-dealers. Reverse repurchase agreements are agreements that allow us to
borrow money using our securities as collateral.
We had no outstanding borrowings from the Federal Home Loan Bank at
December 31, 2001.
Maturing investment securities are a relatively predictable source of
funds. However, deposit flows, calls of securities and prepayments of loans
and mortgage-backed securities are strongly influenced by interest rates,
general and local economic conditions and competition in the marketplace.
These factors reduce the predictability of the timing of these sources of
funds.
Our primary investing activities are the origination of residential
real estate, commercial real estate, commercial and industrial and consumer
loans, and the purchase of mortgage-backed and other investment securities.
During the year ended December 31, 2001, Westfield Bank originated loans of
approximately $149.3 million, and during the comparable period of 2000,
Westfield Bank originated loans of approximately $176.5 million. Purchases of
securities totaled $257.5 million for the year ended December 31, 2001 and
$94.2 million for the year ended December 31, 2000. At December 31, 2001,
Westfield Bank had loan commitments to borrowers of approximately $4.1
million, and available home equity and unadvanced lines of credit of
approximately $57.8 million.
Deposit flows are affected by the level of interest rates, by the
interest rates and products offered by competitors and by other factors.
Total deposits increased $35.1 million and $50.9 million during the year
ended December 31, of 2001 and 2000, respectively. Time deposit accounts
scheduled to mature within one year were $282.2 million at December 31, 2001.
Based on Westfield Bank's deposit retention experience and current pricing
strategy, it anticipates that a significant portion of these certificates of
deposit will remain on deposit. We monitor our
47
liquidity position frequently and anticipate that we will have sufficient
funds to meet our current funding commitments.
At December 31, 2001, we exceeded each of the applicable regulatory
capital requirements. Our tier 1 leverage capital was $129.7 million, or
17.27% to average assets. Our tier 1 capital to risk weighted assets was
$129.7 million or 28.09%. We had total capital to risk weighted assets of
$133.8 or 28.98%.
We do not anticipate any other material capital expenditures during
calendar year 2002, nor do we have any balloon or other payments due on any
long-term obligations or any off-balance sheet items other than the
commitments and unused lines of credit noted above.
Management of Market Risk
As a financial institution, our primary market risk is interest rate
risk since substantially all transactions are denominated in U.S. dollars
with no direct foreign exchange or changes in commodity price exposure.
Fluctuations in interest rates will affect both our level of income and
expense on a large portion of our assets and liabilities. Fluctuations in
interest rates will also affect the market value of all interest earning
assets.
The primary goal of our interest rate management strategy is to limit
fluctuations in net interest income as interest rates vary up or down and
control variations in the market value of assets, liabilities and net worth
as interest rates vary. We seek to coordinate asset and liability decisions
so that, under changing interest rate scenarios, net interest income will
remain within an acceptable range.
To achieve the objectives of managing interest rate risk, Westfield
Bank's Asset and Liability Management Committee meets monthly to discuss and
monitor the market interest rate environment relative to interest rates that
are offered on its products. The Asset and Liability Management Committee
presents periodic reports to the Board of Directors of Westfield Bank and the
Board of Trustees of Westfield Mutual Holding Company at their regular
meetings.
Historically, Westfield Bank's lending activities have emphasized
residential real estate and commercial real estate loans. However, since
1996, Westfield Bank has increased its emphasis on commercial and consumer
lending and deposit relationships. Commercial and industrial loans and
consumer loans have grown 157.6% and 77.7%, respectively, since December 31,
1996. Commercial and industrial loans have also grown 43.9% since December
31, 1999. The indirect automobile loan portfolio grew substantially in 1999
as a result of aggressive pricing and the addition of several new automobile
dealers. Management determined to temporarily curtail its indirect lending in
fiscal year 2000 and 2001 to allow the portfolio to become more seasoned, but
may decide to grow the indirect automobile loan portfolio in the future. We
believe that Westfield Bank's increased emphasis on commercial and consumer
lending will allow it to diversify its loan portfolio while continuing to
meet the needs of the businesses and individuals that it serves.
Westfield Bank's primary source of funds has been deposits, consisting
primarily of time deposits, money market accounts, savings accounts, demand
accounts and NOW accounts, which
48
have shorter terms to maturity than the loan portfolio. Several strategies
have been employed to manage the interest rate risk inherent in the
asset/liability mix, including but not limited to:
* maintaining the diversity of our existing loan portfolio through
the origination of commercial loans, commercial real estate loans
and consumer loans which typically have variable rates and
shorter terms than residential mortgages; and
* emphasizing investments with expected short-term maturities of
five years or less.
In addition, emphasis on commercial and consumer loans has reduced the
average maturity of Westfield Bank's loan portfolio. Moreover, the actual
amount of time before loans are repaid can be significantly affected by
changes in market interest rates. Prepayment rates will also vary due to a
number of other factors, including the regional economy in the area where the
loans were originated, seasonal factors, demographic variables and the
assumability of the loans. However, the major factors affecting prepayment
rates are prevailing interest rates, related financing opportunities and
competition. We monitor interest rate sensitivity so that we can adjust our
asset and liability mix in a timely manner and minimize the negative effects
of changing rates.
Each of the Westfield Bank's sources of liquidity is vulnerable to
various uncertainties beyond the control of the Westfield Bank. Scheduled
loan and security payments are a relatively stable source of funds, while
loan and security prepayments and calls, and deposit flows vary widely in
reaction to market conditions, primarily prevailing interest rates. Asset
sales are influenced by pledging activities, general market interest rates
and unforeseen market conditions. The Westfield Banks's financial condition
is affected by its ability to borrow at attractive rates, retain deposits at
market rates and other market conditions. Management considers the Westfield
Banks's sources of liquidity to be adequate to meet expected funding needs
and also to be responsive to changing interest rate markets.
Net Interest and Dividend Income Simulation. We use a simulation model
to monitor interest rate risk. This model reports the net interest income at
risk primarily under six different interest rate change environments.
Specifically, an analysis is performed of changes in net interest income
assuming changes in interest rates, both up and down 100, 200 and 300 basis
points from current rates over the one year time period following the current
consolidated financial statement.
The changes in interest income and interest expense due to changes in
interest rates reflect the interest sensitivity of our interest earning
assets and interest bearing liabilities. For example, in a rising interest
rate environment, the interest income from an adjustable rate mortgage will
increase depending on its repricing characteristics while the interest income
from a fixed rate loan would not increase until it was repaid and loaned out
at a higher interest rate.
49
The tables below set forth as of December 31, 2002 the estimated
changes in net interest and dividend income that would result from
incremental changes in interest rates over the applicable twelve-month
period.
For the Twelve Months Ending December 31, 2002
(Dollars in thousands)
------------------------------------------------
Changes in Net Interest
Interest Rates (Basis and Dividend
Points) Income %Change
------------------------------------------------
<s> <c> <c>
300 26,529 3.2%
200 26,335 2.4
100 26,059 1.3
0 25,718 N/A
-100 25,199 -2.0
-200 24,740 -3.8
-300 24,144 -6.1
Market rates were assumed to increase and decrease 100 basis points,
200 basis points, and 300 basis points in even increments over the twelve
month period. The repricing and/or new rates of assets and liabilities moved
in tandem with market rates. However, in certain deposit products, the use of
data from a historical analysis indicated that the rates on these products
would move only a fraction of the rate change amount.
Westfield Bank developed consolidated balance sheet growth projections
for the twelve month period. The same product mix and growth strategy was
used for all rate change scenarios.
Pertinent data from each loan account, deposit account and investment
security was used to calculate future cash flows. The data included such
items as maturity date, payment amount, next repricing date, repricing
frequency, repricing index and spread. Prepayment speed assumptions were
based upon the difference between the account rate and the current market
rate.
Another circumstance that affects the results is that market rates are
relatively low. In the three declining rate scenarios, Westfield Bank
forecasted that its rates on some deposit products would not fall as sharply
as market rates. For example, because the rate on regular savings accounts is
1.05%, it is not possible for the rate to decrease by 200 basis points or 300
basis points.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase
method of accounting for business combinations initiated after December 31,
2001 and eliminates the pooling-of-interests method.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets," which became effective January 1, 2002. SFAS No. 142
requires, among other things, the discontinuance of goodwill amortization,
the reclassification of certain existing recognized
50
intangibles as goodwill, the reassessment of the useful lives of existing
recognized intangibles and the identification of reporting units for purposes
of assessing potential future impairments of goodwill. SFAS 142 also requires
a transitional goodwill impairment test six months from the date of adoption.
Accounting for the Impairment or Disposal of Long- Lived Assets - In
August 2001, the FASB issued SFAS No. 144, " Accounting for the Impairment or
Disposal of Long - Lived Assets" ("SFAS No. 144) which supercedes SFAS No.
121 and portions of APB Opinion No. 30. This statement is effective for
financial statements issued for fiscal years beginning after December 15,
2001 and interim periods within these fiscal years.
The adoption of these standards did not have a material effect on its
consolidated financial statements.
Critical Accounting Policies
Westfield Financial's accounting policies are disclosed in Note 2 to
the Consolidated Financial Statements. The more critical policies given
Westfield Financial's current business strategy and asset/liability structure
are accounting for non performing loans, the allowance for loan losses and
provision for credit loans and the classification of securities as either
held to maturity or available for sale. In addition to the information
disclosure in the Notes to the Consolidated Financial Statements, Westfield
Financial's policy on each of these accounting policies is described in
detail in the applicable sections of Management's Discussion and Analysis of
Financial Condition and results of Operations.
Securities, including mortgage backed securities, which management has
the positive intent and ability to hold until maturity are classified as held
to maturity and are carried at amortized cost. Securities, including
mortgage-backed securities, which have been identified as assets for which
there is not a positive intent to hold to maturity are classified as
available for sale and are carried at fair value with unrealized gains and
losses, net of income taxes, reported as a separate component of equity.
Accordingly, a misclassification would have a direct effect on stockholders'
equity. Sales or reclassification as available for sale (except for certain
permitted reasons) of held to maturity securities may result in the
reclassification of all such securities to available for sale. The company
has never sold held to maturity securities or reclassified such securities to
available for sale other than in specifically permitted circumstances.
Westfield Financial does not acquire securities or mortgage backed securities
for purposes of engaging in trading activities.
Westfield Financial's general policy is to discontinue the accrual of
interest when principal or interest payments are delinquent 90 days or more,
or earlier if the loan is considered impaired. Any unpaid amounts previously
accrued on these loans are reversed from income. Subsequent cash receipts are
applied to the outstanding principal balance or to interest income if, in the
judgment of management, collection of principal balance is not in question.
Loans are returned to accrual status when they become current as to both
principal and interest and when subsequent performance reduces the concern as
to the collectibility of principal and interest. Loan fees and certain direct
loan origination costs are deferred, and the net fee or cost is recognized as
an adjustment to interest income over the estimated average lives of the
related
51
loans. Compensation to an auto dealer is normally based upon a spread that a
dealer adds on the loan base rate set by Westfield Financial. The
compensation is paid to an automobile dealer shortly after the loan is
originated. Westfield Financial records the amount as a deferred cost that is
amortized over the life of the loans in relation to the interest paid by the
consumer.
The process of evaluating the loan portfolio, classifying loans and
determining the allowance and provision is described in detail on page 16.
Westfield Financial's methodology for assessing the appropriations of the
allowance consists of two key components, which are a specific allowance for
identified problem or impaired loans and a formula allowance for the
remainder of the portfolio. Measurement of impairment can be based on present
value of expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price or the fair value of the
collateral, if the loan is collateral dependent. This evaluation is
inherently subjective as it requires material estimates that may be
susceptible to significant change. The appropriations of the allowance is
also reviewed by management based upon its evaluation of then-existing
economic and business conditions affecting the key lending areas of Westfield
Financial and other conditions, such as new loan products, credit quality
trends (including trends in non performing loans expected to result from
existing condition), collateral values, loan volumes and concentrations,
specific industry conditions within portfolio segments that existed as of the
balance sheet date and the impact that such conditions were believed to have
had on the collectibility of the loan portfolio. Although management believes
it has established and maintained the allowance for loan losses at adequate
levels, future adjustments may be necessary if economic, real estate and
other conditions differ substantially from the current operating environment.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and accompanying Notes of
Westfield Financial have been prepared in accordance with Accounting
Principles Generally Accepted in the United States of America ("GAAP"). GAAP
generally requires the measurement of financial position and operating
results in terms of historical dollars without consideration for changes in
the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the increased cost of our operations. Unlike
industrial companies, our assets and liabilities are primarily monetary in
nature. As a result, changes in market interest rates have a greater impact
on performance than do the effects of inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, pages 38 to 51, for a discussion of Quantitative
and Qualitative Disclosures About Market Risk.
52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditor's Report F-1
Consolidated Balance Sheets as of December 31, 2001 F-2
and 2000.
Consolidated Statements of Income for the Years F-3
Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Stockholders' F-4
Equity for the Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years F-5
Ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements F-1 - F-29
All schedules are omitted because they are not required or applicable, or the
required information is shown in the consolidated financial statements or
notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
Composition of our Boards. Westfield Financial has 12 directors, each
of whom belongs to one of three classes with staggered three-year terms of
office. Classes One, Two and Three will have directors whose terms expire in
2002, 2003 and 2004, respectively. At each of the annual shareholder meetings
of Westfield Financial, the shareholders will elect directors to fill the
seats of the directors whose terms are expiring in that year and any vacant
seats.
Who Our Directors Are. The following table states our directors' names,
their ages as of December 31, 2001, the years when they began serving as
directors and the years when their current terms of office as directors will
expire.
53
Bank Company
Director Director Term
Name Age Since Since Expires
- -----------------------------------------------------------------
<s> <c> <c> <c> <c>
Victor J. Carra 61 1995 2001 2004
David C. Colton, Jr. 58 1980 2001 2003
Robert T. Crowley, Jr. 53 1999 2001 2002
Thomas J. Howard 69 1979 2001 2004
Harry C. Lane 63 1978 2001 2002
William H. McClure 66 1996 2001 2002
Mary C. O'Neil 66 1994 2001 2003
Richard C. Placek 62 1979 2001 2004
Paul R. Pohl 60 1999 2001 2002
Charles E. Sullivan 58 1992 2001 2004
Thomas C. Sullivan 68 1989 2001 2004
Donald A. Williams 57 1983 2001 2003
Our Directors' Backgrounds. The business experience for the past five
years of each of our directors is as follows:
Victor J. Carra has served as the Executive Vice President of Westfield
Bank since 1998 and Westfield Financial since its inception in 2001. Since
1975, Mr. Carra has served in various capacities during his employment with
Westfield Bank.
David C. Colton, Jr. is the owner and operator of The Colton Agency,
Inc., an insurance agency located in Westfield, Massachusetts. Mr. Colton has
served in these capacities since 1966.
Robert T. Crowley, Jr. is a Certified Public Accountant and a partner
in the accounting firm of Downey, Sweeney, Fitzgerald & Co., P.C. Mr. Crowley
has been a partner with this firm since 1980 and a Certified Public
Accountant since 1979.
Thomas J. Howard retired from Westfield Bank in 1994 after having
served as an Assistant Treasurer, Treasurer, Vice President and Executive
Vice President during his employment with Westfield Bank since 1964. Since
his retirement in 1994, Mr. Howard has served as a corporator and trustee of
Westfield Mutual Holding Company and a director of Westfield Bank. He has
served as a director of Westfield Financial since its inception in 2001.
Harry C. Lane is the President of John S. Lane & Son, Inc., a quarry
and asphalt company located in Westfield, Massachusetts. Mr. Lane has served
in this capacity since 1986.
William H. McClure is the President of the McClure Insurance Agency,
Inc., a position he has held since 1993.
Mary C. O'Neil is the Director of Development and Marketing at Noble
Health Systems, located in Westfield, Massachusetts. Ms. O'Neil has held this
position since 1993. Prior to that, she served as President of T.L. O'Neil
Insurance Agency, Inc.
54
Richard C. Placek is the President of Commercial Distributing Company,
located in Westfield Massachusetts. Mr. Placek has held this position since
1985. Prior to that, he served as General Manager.
Paul R. Pohl has served as the President and Owner of Chemi-Graphic,
Inc., a name plate manufacturer company located in Ludlow, Massachusetts. Mr.
Pohl has served in this capacity since 1964.
Charles E. Sullivan is the President of Charles E. Sullivan C.P.A.,
Inc., a public accounting firm located in West Springfield, Massachusetts.
Mr. Sullivan has served in this capacity since 1979.
Thomas C. Sullivan is retired and was formerly the President and Chief
Operating Officer of Sullivan Paper Co., Inc., located in West Springfield,
Massachusetts. He retired from this position in 1998. Mr. Sullivan presently
serves as a director of Sullivan Paper Co., Inc., a position he has held
since 1959. He also serves as President and Director of Patriot Realty,
located in Appleton, Wisconsin and is the Vice President and Director of
George Sullivan Realty, a realty company located in West Springfield,
Massachusetts. Mr. Sullivan has served in these capacities since 1994 and
1970, respectively.
Donald A. Williams has served as President of Westfield Bank since 1983
and Chief Executive Officer of Westfield Bank since 1987 and of Westfield
Financial since its inception in 2001.
Executive Officers Who are Not Directors
Michael J. Janosco, Jr., age 54, has served as the Chief Financial
Officer and Treasurer of Westfield Bank since 1999 and of Westfield Financial
since its inception in 2001. Mr. Janosco was previously a partner at KPMG
Peat Marwick until his retirement in 1994. From 1994 to 1997, he served as
the Chief Financial Officer and Treasurer of Primary Bank, located in
Peterborough, New Hampshire.
James C. Hagan, age 40, has served as Vice President and Commercial
Loan Department Manager of Westfield Bank since 1998. From 1994 through 1998,
Mr. Hagan was a Commercial Loan Officer at Westfield Bank.
Rebecca S. Kozaczka, age 51, has served as Vice President and
Residential Loan Officer at Westfield Bank since 1989.
Deborah J. McCarthy, age 42, has served as Vice President and
Operations Department Manager since 2000. She has worked for Westfield Bank
in numerous capacities since 1979.
Section 16(a) Beneficial Ownership Reporting Compliance.
Section 16(a) of the Exchange Act requires that our directors,
executive officers, and any person holding more than ten percent of our
common stock file with the SEC reports of ownership changes, and that such
individuals furnish Westfield Financial with copies of the reports.
55
Based solely on our review of the copies of such forms received by it,
or written representations from certain reporting persons, we believe that
all of our executive officers and directors complied with all Section 16(a)
filing requirements applicable to them.
ITEM 11. EXECUTIVE COMPENSATION
Director Compensation
Meeting Fees.
The members of the board of directors of Westfield Financial are
identical to that of Westfield Bank. To date, Westfield Bank has compensated
its directors for their services to the bank. Westfield Financial has not
paid any additional compensation to its directors for their additional
services to the holding company. Westfield Financial expects to continue this
practice until there is a business reason to establish separate compensation
fees.
Westfield Bank's practice has been to pay a fee of $700 to each of its
non-employee directors for attendance at each board meeting. In addition,
each member of the Executive Committee received $1,733 per month for
attendance at meetings, while each member of the Audit Committee received
$400 for each meeting the member attended. Westfield Bank paid fees totaling
$183,000 to its non-employee directors for the year ended December 31, 2001.
Directors' Deferred Compensation Plan. Westfield Bank has established
the Westfield Bank Directors' Deferred Compensation Plan for the benefit of
non-employee directors. Under the Deferred Compensation Plan, each non-
employee director may make an annual election to defer receipt of all or a
portion of his or her director fees received from Westfield Financial and
Westfield Bank. The deferred amounts are allocated to a deferral account and
credited with interest at an annual rate equal to the rate on the highest
yielding certificate of deposit issued by Westfield Bank during the year or
according to the investment return of other assets as may be selected by the
Compensation Committee of Westfield Bank. The Deferred Compensation Plan is
an unfunded, non-qualified plan that provides for distribution of the amounts
deferred to participants or their designated beneficiaries upon the
occurrence of certain events such as death, retirement, disability or a
change in control of Westfield Financial or Westfield Bank (as those terms
are defined in the Deferred Compensation Plan).
56
Executive Officer Compensation
Summary Compensation Table. The following table provides information
about the compensation paid for 2001 to Westfield Financial's and Westfield
Bank's President and Chief Executive Officer and to the other most highly
compensated executive officers whose annual salary and bonus for 2001 was at
least $100,000.
Annual Compensation
---------------------------------------
Other Annual
Name and Compensation All Other
Principal Position Year Salary ($) Bonus ($) ($)(1) Compensation(2)
- --------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c>
Donald A. Williams, President and Chief 2001 290,498 43,575 -- $113,666
Executive Officer 2000 267,616 40,234 -- 106,041
Michael J. Janosco, Jr., Chief Financial 2001 152,100 22,815 -- 7,173
Officer and Treasurer 2000 139,000 20,850 -- 4,344
Victor J. Carra, Executive Vice President 2001 142,116 21,317 -- 43,390
2000 128,741 19,584 -- 40,236
<FN>
- --------------------
<F1> Westfield Bank provides its executive officers with non-cash benefits
and perquisites, such as the use of employer-owned or leased
automobiles. Management of the Bank believes that the aggregate value
of these benefits for 2001 did not, in the case of any executive
officer, exceed $50,000 or 10% of the aggregate salary and annual bonus
reported for him in the Summary Compensation Table.
<F2> Includes the following components for fiscal 2001 and 2000: (1)
employer matching contributions to the Westfield Bank 401(k) Plan: Mr.
Donald A. Williams, $5,250 and $5,100; Mr. Michael J. Janosco, Jr.,
$4,563 and $3,210; and Mr. Victor J. Carra,$ 4,372 and $3,873; (2) the
dollar value of premium payments for life insurance coverage provided
by Westfield Bank: Mr. Donald A. Williams, $4,428 and $3,964; Mr.
Michael J. Janosco, Jr., $2610 and $1,850; and Mr. Victor J. Carra,
$3,230 and $2,997; and (3) amounts accrued under deferred compensation
agreements: Mr. Donald A. Williams, $103,988 and $96,977 and Mr. Victor
J. Carra, $35,788 and $33,366.
</FN>
Employment Agreements
Westfield Financial and Westfield Bank have jointly entered into
employment agreements with Mr. Donald A. Williams to secure his services as
President and Chief Executive Officer, Mr. Victor J. Carra to secure his
services as Executive Vice President, and Mr. Michael J. Janosco, Jr., to
secure his services as Chief Financial Officer. For purposes of Westfield
Financial's obligations, the employment agreements have rolling three-year
terms beginning on the effective date of the reorganization, which by
decision of the executive or joint decision of Westfield Financial and
Westfield Bank may be converted to a fixed three-year term. For purposes of
Westfield Bank's obligations the employment agreements have fixed terms of
three years beginning on the effective date of the reorganization, and may be
renewed annually after a review of the executive's performance. These
agreements provide for minimum annual salaries of $290,498, $142,116 and
$152,100, respectively, discretionary cash bonuses, and participation on
generally applicable terms and conditions in other compensation and fringe
benefit plans. They also guarantee customary corporate indemnification and
errors and omissions insurance coverage throughout the employment term and
for six years after termination.
Westfield Financial and Westfield Bank may terminate each executive's
employment, and each executive may resign, at any time with or without cause.
However, in the event of termination during the term without cause, they will
owe the executive severance benefits generally equal to the value of the cash
compensation and fringe benefits that the executive
57
would have received if he had continued working for an additional three
years. The same severance benefits would be payable if the executive resigns
during the term following: a loss of title, office or membership on the board
of directors; material reduction in duties, functions or responsibilities;
involuntary relocation of the executive's principal place of employment to a
location over 25 miles in distance from Westfield Bank's principal office in
Westfield, Massachusetts and over 25 miles from the executive's principal
residence; or other material breach of contract by Westfield Financial or
Westfield Bank which is not cured within 30 days. For 60 days after a change
in control, each executive may resign for any reason and collect severance
benefits as if he or she had been discharged without cause. The employment
agreements also provide uninsured death and disability benefits.
If Westfield Financial or Westfield Bank experiences a change in
ownership, a change in effective ownership or control or a change in the
ownership of a substantial portion of their assets as contemplated by section
280G of the Internal Revenue Code, a portion of any severance payments under
the employment agreements might constitute an "excess parachute payment"
under current federal tax laws. Federal tax laws impose a 20% excise tax,
payable by the executive, on excess parachute payments. Under the employment
agreements, Westfield Bank and Westfield Financial would reimburse the
executive for the amount of this excise tax and would make an additional
gross-up payment so that, after payment of the excise tax and all income and
excise taxes imposed on the reimbursement and gross-up payments, the
executive will retain approximately the same net-after tax amounts under the
employment agreement that he or she would have retained if there were no 20%
excise tax. The effect of this provision is that Westfield Bank and Westfield
Financial, rather than the executive, bears the financial cost of the excise
tax. Neither Westfield Financial nor Westfield Bank could claim a federal
income tax deduction for an excess parachute payment, excise tax
reimbursement payment or gross-up payment.
Change of Control Agreements
Westfield Bank and Westfield Financial have jointly entered into one-
year change of control agreements with three vice presidents, James C. Hagan,
Rebecca S. Kozaczka and Deborah J. McCarthy. The term of these agreements is
perpetual until Westfield Bank gives notice of non-extension, at which time
the term is fixed for one year.
Generally, Westfield Bank may terminate the employment of any officer
covered by these agreements, with or without cause, at any time prior to a
change of control without obligation for severance benefits. However, if
Westfield Bank or Westfield Financial signs a merger or other business
combination agreement, or if a third party makes a tender offer or initiates
a proxy contest, it could not terminate an officer's employment without cause
without liability for severance benefits. The severance benefits would
generally be equal to the value of the cash compensation and fringe benefits
that the officer would have received if he or she had continued working for
an additional one year. Westfield Bank would pay the same severance benefits
if the officer resigns after a change of control following a loss of title,
office or membership on the Board of Directors, material reduction in duties,
functions or responsibilities, involuntary relocation of his or her principal
place of employment to a location over 25 miles from Westfield Bank's
principal office on the day before the change of control and over 25 miles
58
from the officer's principal residence or other material breach of contract
which is not cured within 30 days. These agreements also provide uninsured
death and disability benefits.
If Westfield Bank or Westfield Financial experiences a change in
ownership, a change in effective ownership or control or a change in the
ownership of a substantial portion of their assets as contemplated by section
280G of the Internal Revenue Code, a portion of any severance payments under
the change of control agreements might constitute an "excess parachute
payment" under current federal tax laws. Any excess parachute payment would
be subject to a federal excise tax payable by the officer and would be non-
deductible by Westfield Bank and Westfield Financial for federal income tax
purposes. The change of control agreements do not provide a tax indemnity.
Benefit Plans
Pension Plan. Westfield Bank maintains a pension plan for its eligible
employees. Generally, employees of Westfield Bank begin participation in the
pension plan once they reach age 21 and complete 1,000 hours of service in a
consecutive 12-month period. Participants in the pension plan become vested
in their accrued benefit under the pension plan upon the earlier of the: (1)
attainment of their "normal retirement age" (as described in the pension
plan) while employed at Westfield Bank; (2) completion of five vesting years
of service with Westfield Bank; or (3) death or disability of the
participant. Participants are generally credited with a vesting year of
service for each year in which they complete at least 1,000 hours of service.
A participant's normal benefit under the pension plan equals the sum of (1)
1.25% of the participant's average compensation (generally defined as the
average taxable compensation for the three consecutive limitation years that
produce the highest average) by the number of years of service the
participant has under the plan up to 25 years of service, plus (2) 0.6% of
the excess of the participant's average compensation over the participant's
covered compensation (the social security taxable wage base for the 35 years
ending in the year the participant becomes eligible for non-reduced social
security benefits) for each year of service under the plan up to 25 years of
service. Participants may retire at or after age 65 and receive their full
benefit under the plan. Participants may also retire early at age 62 or at
age 55 with ten years of service or at age 50 with 15 years of service under
the plan and receive a reduced retirement benefit. Pension benefits are
payable in equal monthly installments for life, or for married persons, as a
joint survivor annuity over the lives of the participant and spouse.
Participants may also elect a lump sum payment with the consent of their
spouse. If a participant dies while employed by Westfield Bank, a death
benefit will be payable to either his or her spouse or estate, or named
beneficiary, equal to the entire amount of the participant's accrued benefit
in the plan. The following table indicates the annual employer-provided
retirement benefits that would be payable under the pension plan upon
retirement at age 65 to a participant electing to receive his pension benefit
in the standard form of benefit, assuming various specified levels of plan
compensation and various specified years of credited service. Under the
Internal Revenue Code, maximum annual benefits under the pension plan are
limited to $140,000 per year and annual compensation for benefit calculation
purposes is limited to $170,000 per year for the 2001 calendar year.
59
Years of Service
---------------------------------------------------
Average Annual
Compensation 10 15 20 25 30
---------------------------------------------------
<s> <c> <c> <c> <c> <c>
$100,000 $16,394 $24,591 $32,788 $40,985 $40,985
125,000 21,019 31,529 42,038 52,548 52,548
150,000 25,644 38,466 51,288 64,110 64,110
170,000 29,344 44,016 58,688 73,360 73,360
200,000 29,344 44,016 58,688 73,360 73,360
300,000 29,344 44,016 58,688 73,360 73,360
400,000 29,344 44,016 58,688 73,360 73,360
The benefits listed on the table above for the pension plan are not
subject to a reduction for Social Security benefits or any other offset
amount. As of December 31, 2001, Messrs. Williams, Janosco and Carra had 28,
2, and 25 years of service, respectively, for purposes of the pension plan.
401(k) Plan. Westfield Bank has adopted the SBERA 401(k) Plan, a tax-
qualified defined contribution plan, for substantially all employees of
Westfield Bank who have attained age 21 and completed at least three months
of service. Eligible employees may contribute from 1% to 15% of annual
compensation to the plan on a pre-tax basis each year, subject to limitations
of the Internal Revenue Code (for 2001 the limit was $10,500). Westfield Bank
makes a matching contribution to the plan equal to 50% of the first six
percent of annual compensation contributed to the plan on a pre-tax basis by
a participant after such participant has completed one year of service.
This plan has an individual account for each participant's
contributions and allows each participant to direct the investment of his or
her account. One permitted investment is Westfield Financial common stock.
Participants direct the voting of shares purchased for their plan accounts.
Employee Stock Ownership Plan (ESOP). This plan is a tax-qualified plan
that covers substantially all employees who have completed 1,000 hours of
service in a 12 month period and attained age 21. The ESOP took effect at the
completion of the reorganization.
Westfield Financial will lend this plan enough money to purchase up to
8% of the shares of the total number of shares held by persons other than
Westfield Mutual Holding Company. The plan intends to purchase all of these
shares in private transactions or on the open market from time to time to the
extent that shares are available for purchase on reasonable terms.
Although contributions to this plan will be discretionary, Westfield
Bank intends to contribute enough money each year to make the required
principal and interest payments on the loan from Westfield Financial. This
loan is for a term of 30 years and calls for level annual payments of
principal and interest. The plan pledges the shares it purchases as
collateral for the loan and hold them in a suspense account.
The plan will not distribute the pledged shares right away. Instead, it
will release a portion of the pledged shares annually. Assuming the plan
repays its loan as scheduled over a 30-year term, we expect that 1/30th of
the shares will be released annually in years 2002 through
60
2030. The plan will allocate the shares released each year among the accounts
of participants in proportion to their compensation for the year. For
example, if a participant's compensation for a year represents 1% of the
total compensation of all participants for the year, the plan would allocate
to that participant 1% of the shares released for the year, subject to
certain legal limitations imposed on tax qualified plans. Participants direct
the voting of shares allocated to their accounts. Shares in the suspense
account will usually be voted by the plan trustee in a way that mirrors the
votes which participants cast for shares in their individual accounts.
As of December 31, 2001, the plan had not purchased any shares of
common stock. This plan may purchase additional shares in the future, and may
do so using borrowed funds, cash dividends, periodic employer contributions
or other cash flow.
Benefit Restoration Plan. Westfield Financial has also established the
Benefit Restoration Plan of Westfield Financial in order to provide
restorative payments to executives who are prevented from receiving the full
benefits contemplated by the ESOP's benefit formula as well as the 401(k)
Plan's benefit formula. The restorative payments consist of payments in lieu
of shares that cannot be allocated to participants under the ESOP due to the
legal limitations imposed on tax-qualified plans and, in the case of
participants who retire before the repayment in full of the ESOP's loan,
payments in lieu of the shares that would have been allocated if employment
had continued through the full term of the loan. The restorative payments
also consist of amounts unable to be provided under the 401(k) Plan due to
certain legal limitations imposed on tax-qualified plans.
Deferred Compensation Agreements. Westfield Bank has also entered into
deferred compensation agreements with each of Donald A. Williams and Victor
J. Carra. Under these agreements, each executive is guaranteed monthly
payments equal to 70% of his monthly salary after retirement for the
remainder of the executive's life or 240 months, whichever is greater. The
amounts of these payments is reduced by any payments received from the
Pension Plan and are also reduced by Social Security payments attributable to
contributions made by Westfield Bank. These agreements also provide for
payments upon the death or disability of the executive that are equal in
amount to the payments that would have been payable to the executive upon
retirement with such payments being made for a period of 120 months.
Compensation Committee Report on Executive Compensation.
The Compensation Committee is composed of Directors Harry C. Lane, Paul
R. Pohl, Thomas C. Sullivan, and Donald A. Williams. None of the members of
the Compensation Committee, except Mr. Williams, were officers or employees
of Westfield Financial or its subsidiaries during 2001 or in prior years.
The following Report of Westfield Financial's Compensation Committee is
provided in accordance with the rules and regulations of the SEC. Pursuant to
such rules and regulations, this Report shall not be deemed "soliciting
material," filed with the SEC subject to Regulation 14A or 14C of the SEC or
subject to the liabilities of Section 18 of the Exchange Act.
61
Compensation Committee Report on Executive Compensation
On December 27, 2001, Westfield Financial, Inc. became the holding
company for Westfield Bank upon completion of a reorganization of Westfield
Mutual Holding Company and related stock offering by Westfield Financial.
The Compensation Committee provides advice and recommendations to the
Board of Directors in the areas of employee salaries and benefit programs.
Compensation of the President and Chief Executive Officer and other executive
officers of Westfield Bank for the fiscal year ended 2001 was paid by
Westfield Bank and determined by the Board of Directors upon the
recommendation of the Compensation Committee for Westfield Bank.
The Committee reviews the compensation and benefits programs for all
executive officers on an annual basis. Recommendations and rationale of Mr.
Donald A. Williams' positions with Westfield Bank are taken into
consideration during such review. Mr. Williams did not participate in the
Committee's decisions regarding his own compensation review and
recommendation.
The Committee strives to provide a compensation program that assures
both the motivation and retention of the executive officers, proper alignment
with the financial interests of Westfield Financial's stockholders, and
competitiveness with the external marketplace. To this end, the Committee
reviewed the compensation practices of a peer group of companies with similar
size and business mix to that of Westfield Bank in order to develop
recommendations for Westfield Bank's executive officers.
Westfield Bank's compensation program for executive officers consists
of: base salary, annual bonuses and long-term incentive awards. These
elements are intended to provide an overall compensation package that is
commensurate with Westfield Bank's financial resources, that is appropriate
to assure that retention of experienced management personnel, and align their
financial interests with those of Westfield Financial's shareholders.
Base Salaries
Salary levels recommended by the Committee are intended to be
competitive with salary levels of the companies in Westfield Bank's peer
groups, commensurate with the executive officers' respective duties and
responsibilities, and reflect the financial performance of Westfield Bank .
Chief Executive Officer
The Compensation Committee recognizes the significant additional
efforts required of the President and Chief Executive Officer in bringing
about Westfield Financial's initial public offering.
Based on the foregoing criteria discussed above, for fiscal year ended
December 31, 2001, Mr. Williams' base salary was $288,842 and he was awarded
a bonus of $43,575.
62
Westfield Financial, Inc.
Compensation Committee
Harry C. Lane
Paul R. Pohl
Thomas C. Sullivan
Donald A. Williams
Compensation Committee Interlocks and Insider Participation.
Except for Mr. Williams, who recused himself from discussions regarding
his compensation, none of the executive officers of Westfield Financial
served as a member of another entity's Board of Directors or as a member of
the Compensation Committee (or other board committee performing equivalent
functions) during 2001, which entity had an executive officer serving on the
Board of Directors or as a member of the Compensation Committee of Westfield
Financial. There are no interlocking relationships between Westfield
Financial and other entities that might affect the determination of the
compensation of our executive officers.
Performance Graph.
A performance graph is not included due to the fact that the
reorganization and stock offering took place on December 27, 2001 and
therefore sufficient data was unavailable at December 31, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Shareholders of Westfield Financial.
The following table contains common stock ownership information for
persons known to Westfield Financial to "beneficially own" 5% or more of
Westfield Financial's common stock as of December 31, 2001. In general,
beneficial ownership includes those shares that a person has the power to
vote, sell, or otherwise dispose of. Beneficial ownership also includes that
number of shares which an individual has the right to acquire within 60 days
(such as stock options) of the date this table was prepared. Two or more
persons may be considered the beneficial owner of the same shares. Westfield
Financial obtained the information provided in the following table from
filings with the SEC and from Westfield Financial. In this Annual Report on
Form 10-K, "voting power" is the power to vote or direct the voting of
shares, and "investment power" includes the power to dispose or direct the
disposition of shares.
Name and Address of Beneficial Amount and Nature of
Title of Class Owner Beneficial Ownership Percent
- -------------------------------------------------------------------------------------
<s> <c> <c> <c>
Common Stock Westfield Mutual Holding Company 5,607,400(1) 53.0%
141 Elm Street
Westfield, Massachusetts 01581
<FN>
- --------------------
<F1> As reported by Westfield Mutual Holding Company in a Schedule 13D dated
January 7, 2002, who reported sole voting and dispositive power over
5,607,400 shares.
</FN>
63
Security Ownership of Management.
The following table shows the number of shares of Westfield Financial's
common stock beneficially owned by each director, each executive officer
appearing in the "Summary Compensation Table," and all directors and
executive officers of Westfield Financial as a group, as of March 20, 2002.
Except as otherwise indicated, each person and each group shown in the table
has sole voting and investment power with respect to the shares of common
stock listed next to his or her name.
Amount and Nature of
Position with Beneficial Percent of Common
Name Westfield Financial Ownership(1)(2) Stock Outstanding
- ----------------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Victor J. Carra Executive Vice President and
Director 21,490(3) *
David C. Colton, Jr. Director 2,443(4) *
Robert T. Crowley, Jr. Director 2,500(5) *
Thomas J Howard Director 500(6) *
Michael J. Janosco, Jr. Chief Financial Officer 33,000(7) *
Harry C. Lane Director -- *
William H. McClure Director 3,000(8) *
Mary C. O'Neil Director 500(9) *
Richard C. Placek Director 5,000(10) *
Paul R. Pohl Director 9,996(11) *
Charles E. Sullivan Director 1,500 *
Thomas C. Sullivan Director 30,000 *
Donald A. Williams President, Chief Executive
Officer, and Director 30,000(12) *
All Executive Officers
and Directors as
a Group (16 persons) 537,737(13) 10.81%
<FN>
- --------------------
* Less than one percent of the total outstanding shares of common stock.
<F1> See "Principal Shareholders of Westfield Financial" for definition of
"beneficial ownership."
<F2> Based on a total of 10,580,000 shares of Westfield Financial's Common
Stock outstanding as of December 31, 2001.
<F3> Includes 13,370 shares held in Westfield Bank's 401(k) plan, 690 shares
held in an individual retirement account ("IRA") for the benefit of Mr.
Carra's spouse, 830 shares held in an IRA for the benefit of Mr. Carra,
and 6,600 shares held jointly with Mr. Carra's spouse.
<F4> Includes 1,272 shares held in an IRA for the benefit of Mr. Colton's
spouse, 671 shares held in an IRA for the benefit of Mr. Colton, and
500 shares held jointly with Mr. Colton's spouse.
<F5> Includes 2,500 shares held jointly with Mr. Crowley's spouse.
<F6> Includes 500 shares held by the Thomas J. Howard Revocable trust for
which Mr. Howard and his spouse serve as trustees.
<F7> Includes 20,279 shares held jointly with Mr. Janosco's spouse, and
12,721 shares held in an IRA for the benefit of Mr. Janosco.
<F8> Includes 3,000 shares held jointly with Mr. McClure's spouse.
<F9> Includes 500 shares held jointly with Ms. O'Neil's spouse.
<F10> Includes 2,500 shares held by Mr. Placek's spouse.
<F11> Includes 9,996 shares held jointly with Mr. Pohl's spouse.
<F12> Includes 20,000 shares held jointly with Mr. Williams' spouse, 5,100
shares held in an IRA for the benefit of Mr. Williams, and 5,200 shares
held in an IRA for the benefit of Mr. Williams' spouse.
<F13> The figures shown for each of the executive officers named in the table
do not include [397,808] shares held in trust pursuant to the ESOP
that have not been allocated as of December 31, 2001 to any
individual's account and as to which each of the executive officers
named in the table share voting powers with the other ESOP
participants. The figure shown for all directors and executive officers
as a group includes [397,808] as to which members of Westfield
64
Financial's Compensation Committee (consisting of Messrs. Lane, Pohl,
Thomas C. Sullivan and Williams) may be deemed to have sole investment
power, except in limited circumstances, thereby causing each such
member to be deemed a beneficial owner of such shares. Each of the
members of the Compensation Committee disclaims beneficial ownership of
such shares and, accordingly, such shares are not attributed to the
members of the Compensation Committee individually. See "Benefit Plans-
Employee Stock Ownership Plan".
</FN>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We make loans to our trustees/directors, officers and employees. These
loans bear interest at the same rate as loans offered to non-
trustee/directors, officers and employees and have the same underwriting
terms that apply to non-trustees/directors, officers and employees. At
December 31, 2001, loans to executive officers, directors and their
associates totaled $1.5 million.
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Listed below are all financial statements and exhibits filed as part of
this report:
a. Financial Statements, Schedules, and Exhibits
(1) The consolidated statements of assets and liabilities transferred
in reorganization of Westfield Financial, Inc. and subsidiaries
as of December 31, 2001 and 2000 and the related consolidated
statements of income and comprehensive income relating to assets
and liabilities transferred in reorganization, changes in equity
transferred in reorganization, and cash flows of assets and
liabilities transferred in the reorganization for each of the
years in the three-year period ended December 31, 2001, together
with the related notes and independent auditors' report of
Deloitte & Touche LLP, independent certified public accountants.
(2) Schedules omitted as they are not applicable.
(3) See Exhibit Index.
b. Reports on Form 8-K - none.
Exhibit Description
2.1 Plan of Reorganization and Minority Stock Issuance of
Westfield Mutual Holding Company, as amended. *
3.1 Articles of Organization of Westfield Financial, Inc.*
3.2 Bylaws of Westfield Financial, Inc. *
3.3 Amended and Restated Charter of Westfield Mutual Holding
Company*
3.4 Amended and Restated Bylaws of Westfield Mutual Holding
Company*
4.1 Articles of Organization of Westfield Financial, Inc. (See
Exhibit 3.1)*
4.2 Bylaws of Westfield Financial, Inc. (See Exhibit 3.2)*
4.3 Form of Stock Certificate of Westfield Financial, Inc.*
10.1 Form of Employee Stock Ownership Plan of Westfield
Financial, Inc.*
10.2 Form of the Benefit Restoration Plan of Westfield Financial,
Inc.*
65
10.3 Form of Employment Agreement between Donald A. Williams and
Westfield Financial, Inc.*
10.4 Form of Employment Agreement between Victor J. Carra and
Westfield Financial, Inc.*
10.5 Form of Employment Agreement between Michael J. Janosco, Jr.
and Westfield Financial, Inc.*
10.6 Form of One Year Change in Control Agreement by and among
certain officers and Westfield Financial, Inc. and Westfield
Bank*
10.7 Form of Directors' Deferred Compensation Plan*
10.8 The SBERA 401(k) Plan adopted by Westfield Bank**
21.1 Subsidiaries of the Registrant*
23.1 Consent of Deloitte & Touche LLP
<FN>
- --------------------
* Incorporated herein by reference to the Registration Statement No.
333-68550, on Form S-1 of Westfield Financial filed with the SEC on
August 28, 2001, as amended.
** Incorporated herein by reference to the Registration Statement No.
333-73132, on Form S-8, filed with the SEC on November 9, 2001, as
amended.
</FN>
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 26,
2002.
Westfield Financial, Inc.
By: /s/ Donald A. Williams
--------------------------
Donald A. Williams
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
and any rules and regulations promulgated thereunder, this Annual Report on
Form 10-K, has been signed by the following persons in the capacities and on
the dates indicated.
Name Title Date
- -------------------------------------------------------------------------------------
<s> <c> <c>
/s/ Donald A. Williams President, Chief Executive March 26, 2002
- ----------------------------- Officer and Director
Donald A. Williams (Principal Executive Officer)
/s/ Victor J. Carra Executive Vice President March 26, 2002
- ----------------------------- and Director
Victor J. Carra
/s/ Michael J. Janosco, Jr. Chief Financial Officer and March 26, 2002
- ----------------------------- Treasurer (Principal Accounting
Michael J. Janosco, Jr. Officer)
/s/ David C. Colton, Jr. Director March 26, 2002
- -----------------------------
David C. Colton, Jr.
/s/ Robert T. Crowley, Jr. Director March 26, 2002
- -----------------------------
Robert T. Crowley, Jr.
/s/ Thomas J. Howard Director March 26, 2002
- -----------------------------
Thomas J. Howard
/s/ Harry C. Lane Director March 26, 2002
- -----------------------------
Harry C. Lane
/s/ William H. McClure Director March 26, 2002
- -----------------------------
William H. McClure
67
/s/ Mary C. O'Neil Director March 26, 2002
- -----------------------------
Mary C. O'Neil
/s/ Richard C. Placek Director March 26, 2002
- -----------------------------
Richard C. Placek
/s/ Paul R. Pohl Director March 26, 2002
- -----------------------------
Paul R. Pohl
/s/ Charles E. Sullivan Director March 26, 2002
- -----------------------------
Charles E. Sullivan
/s/ Thomas C. Sullivan Director March 26, 2002
- -----------------------------
Thomas C. Sullivan
68
WESTFIELD FINANCIAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except per Share Amounts)
December 31,
--------------------
2001 2000
---- ----
<s> <c> <c>
ASSETS
CASH AND DUE FROM BANKS $ 14,169 $ 17,733
FEDERAL FUNDS SOLD 34,267 10,020
INTEREST-BEARING DEPOSITS 8,599 4,976
--------------------
Cash and cash equivalents 57,035 32,729
--------------------
SECURITIES:
Available for sale - at estimated fair value 74,184 75,709
Held To Maturity - at amortized cost (estimated
fair value of $46,155 in 2001 and $39,739 in 2000) 45,614 39,461
MORTGAGE BACKED SECURITIES:
Available for sale - at estimated fair value 87,150 52,580
Held To Maturity - at amortized cost (estimated
fair value of $81,367 in 2001, and $6,864 in 2000) 81,007 6,806
FEDERAL HOME LOAN BANK
OF BOSTON AND OTHER STOCK 3,634 3,446
LOANS - Net of allowance for loan losses
of $3,923 in 2001, and $3,434 in 2000 413,546 464,531
PREMISES AND EQUIPMENT - Net 13,581 11,744
ACCRUED INTEREST AND DIVIDENDS 4,201 4,172
OTHER ASSETS 2,780 3,613
--------------------
TOTAL ASSETS $782,732 $694,791
====================
LIABILITIES AND EQUITY
LIABILITIES:
DEPOSITS:
Noninterest-bearing $ 48,247 $ 38,500
Interest-bearing 588,862 563,396
--------------------
Total deposits 637,109 601,896
CUSTOMER REPURCHASE AGREEMENTS 6,061 7,686
OTHER LIABILITIES 8,245 7,454
--------------------
Total liabilities 651,415 617,036
--------------------
COMMITMENTS AND CONTINGENCIES
EQUITY:
Preferred stock - $.01 par value, 5,000,000 shares
authorized none outstanding - -
Common stock - $.01 par value, 10,580,000 shares
authorized, 10,580,000 issued and outstanding 106 -
Additional paid-in capital 47,623 -
Retained earnings 81,808 76,791
Accumulated other comprehensive income 1,780 964
--------------------
F-1
Total equity 131,317 77,755
--------------------
TOTAL LIABILITIES AND EQUITY $782,732 $694,791
====================
See notes to consolidated financial statements.
F-2
WESTFIELD FINANCIAL, INC.
AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
Years Ended
December 31,
-----------------------------
2001 2000 1999
---- ---- ----
<s> <c> <c> <c>
INTEREST AND DIVIDEND INCOME:
Residential and commercial real estate loans $24,737 $26,523 $25,891
Securities and mortgage backed securities 12,184 9,216 6,909
Consumer loans 5,577 6,306 5,493
Commercial and industrial loans 3,477 3,255 2,520
Federal funds sold 562 663 361
Stocks 401 386 289
Interest-bearing deposits 605 369 387
-----------------------------
Total interest and dividend income 47,543 46,718 41,850
-----------------------------
INTEREST EXPENSE:
Deposits 24,730 24,087 21,060
Customer repurchase agreements 246 320 41
Other borrowings 26 128 50
-----------------------------
Total interest expense 25,002 24,535 21,151
-----------------------------
Net interest and dividend income 22,541 22,183 20,699
PROVISION FOR LOAN LOSSES 1,630 1,089 843
-----------------------------
Net interest and dividend income
after provision for loan losses 20,911 21,094 19,856
-----------------------------
NONINTEREST INCOME:
Service charges and fees 1,687 1,320 1,040
Gain on sales of securities, net 830 1,535 515
-----------------------------
Total noninterest income 2,517 2,855 1,555
-----------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 8,416 7,871 6,994
Occupancy 1,788 1,422 1,198
Computer operations 1,487 1,185 988
Stationery, supplies and postage 574 502 628
Other 3,634 3,704 3,178
-----------------------------
Total noninterest expense 15,899 14,684 12,986
-----------------------------
INCOME BEFORE INCOME TAXES 7,529 9,265 8,425
INCOME TAXES 2,512 3,185 2,898
-----------------------------
NET INCOME $ 5,017 $ 6,080 $ 5,527
=============================
See notes to consolidated financial statements.
F-3
WESTFIELD FINANCIAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in Thousands)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income Total
------ ---------- -------- ------------- -----
<s> <c> <c> <c> <c> <c>
BALANCE, JANUARY 1, 1999 $ - $ - $65,184 $1,488 $ 66,672
Comprehensive income:
Net income - - 5,527 - 5,527
Unrealized losses on securities arising
during the year, net of tax benefit of $298 - - - (570) (570)
Reclassification for gains included in
net income, net of taxes of $201 - - - (384) (384)
--------
Comprehensive income - - - - 4,573
------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 - - 70,711 534 71,245
Comprehensive income:
Net income - - 6,080 - 6,080
Unrealized losses on securities arising
during the year, net of tax benefit of $681 - - - (968) (968)
Reclassification for losses included in net
income, net of tax benefit of $734 - - - 1,398 1,398
--------
Comprehensive income - - - - 6,510
------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 - - 76,791 964 77,755
Comprehensive income
Net income - - 5,017 - 5,017
Unrealized gains on securities arising
during the year, net of taxes of $681 - - - 1,360 1,360
Reclassification for gains included in net
income, net of taxes of $273 - - - (544) (544)
--------
Comprehensive income - - - - 5,833
Net proceeds from sale of common stock 106 47,723 - - 47,829
Capital Distribution to the Parent Company - (100) - - (100)
------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $106 $47,623 $81,808 $1,780 $131,317
============================================================
See notes to consolidated financial statements.
F-4
WESTFIELD FINANCIAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Years Ended December 31,
----------------------------------
2001 2000 1999
---- ---- ----
<s> <c> <c> <c>
OPERATING ACTIVITIES:
Net income $ 5,017 $ 6,080 $ 5,527
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,630 1,089 843
Valuation adjustment of other real estate owned 30 - 21
Other than temporary write-down of securities 315 - 83
Depreciation of premises and equipment 1,100 731 604
Net amortization of premiums and discounts on
securities, mortgage backed securities and
mortgage loans 341 (26) 230
Loss (gain) on sale of other real estate owned (15) 7 (8)
Gain on sale of mortgage loans - - -
Gain on sales of securities- net (1,145) (1,535) (515)
Deferred income tax provision 2,857 (61) (349)
Changes in assets and liabilities:
Accrued interest and dividends (29) (565) (188)
Other assets (308) 912 (216)
Other liabilities (1,044) (566) 245
----------------------------------
Net cash provided by operating activities 8,749 6,066 6,277
----------------------------------
INVESTING ACTIVITIES:
Securities, held to maturity:
Purchases (28,099) (15,288) (24,502)
Proceeds from maturities and principal collections 22,043 20,052 20,899
Securities, available for sale:
Purchases (29,421) (33,737) (21,415)
Proceeds from sales 6,478 4,799 4,528
Proceeds from calls, maturities and
principal collections 24,466 7,584 15,589
Mortgage backed securities, held to maturity:
Purchases (89,761) (4,671) -
Principal collections 15,135 2,384 2,192
Mortgage backed securities, available for sale:
Purchases (50,736) (40,476) (13,035)
Proceeds from sales 52,807 6,668 2,446
Principal collections 24,747 5,828 6,262
Purchase of Federal Home Loan Bank of Boston
and other stock (188) (90) (190)
Loans (10,366) 1,546 (53,004)
Proceeds from sale of other real estate owned 72 173 344
Net purchases of premise and equipment (2,937) (3,886) (2,607)
----------------------------------
Net cash used in investing activities (65,760) (49,114) (62,493)
----------------------------------
FINANCING ACTIVITIES:
Increase in deposits 35,213 50,872 42,711
Increase (decrease) in customer repurchase agreements (1,625) 4,412 3,274
Federal Home Loan Bank of Boston advances, net - (5,000) 5,000
Net proceeds received from stock offering 47,829 - -
Capital Distribution to the parent company (100) - -
----------------------------------
Net cash provided by financing activities 81,317 50,284 50,985
----------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS 24,306 7,236 (5,231)
Beginning of year 32,729 25,493 30,724
----------------------------------
End of year $ 57,035 $ 32,729 $ 25,493
==================================
See notes to consolidated financial statements.
F-5
WESTFIELD FINANCIAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
1. REORGANIZATION AND STOCK OFFERING
On December 27, 2001, the Board of Directors of Westfield Mutual
Holding Company ("Mutual Holding Company") completed a plan of
reorganization (the "Plan") whereby the Mutual Holding Company formed
a mid-tier stock holding company ("Westfield Financial, Inc." or the
"Company") and exchanged 100% of the common stock of Westfield Bank
(the "Bank") for a majority interest in Westfield Financial, Inc.
Pursuant to the Plan, shares of Westfield Financial, Inc. were
offered for subscription by depositors with eligible accounts at the
Bank as of specified dates. The Company issued 10,580,000 shares of
Common Stock (par value $0.01 per share) at a price of $10.00 per
share, of which 47% of these shares, or 4,972,600 shares, were sold
to the public, including depositors of the Bank and 53% of these
shares, or 5,607,400 shares, were issued to the Mutual Holding
Company. Net proceeds from the stock offering totaled $47.7 million.
Costs related to the reorganization were charged against the proceeds
from the shares sold in the reorganization. Reorganization costs of
approximately $2.1 million were incurred.
In connection with the reorganization, a "Liquidation Account" was
established in an amount equal to the net worth of the Mutual Holding
Company set forth in its latest consolidated statement of financial
condition contained in the reorganization prospectus. The function of
the Liquidation Account is to establish a priority on liquidation to
the assets of the Company to Eligible Account Holders (as defined in
the Plan) who continue to maintain deposits in the Bank after the
reorganization. In the unlikely event of a complete liquidation of
the Company, and only in such event, each Eligible Account Holder
would receive from the Liquidation Account a liquidation distribution
based on the their proportionate share of the then remaining
qualifying deposits.
Current regulations allow the Bank to pay dividends on its stock if
its regulatory capital would not thereby be reduced below the amount
then required for the aforementioned Liquidation Account. Also,
capital distribution regulations limit the Bank's ability to make
capital distributions which include dividends, stock redemptions and
repurchases and other transactions charged to the capital accounts
based on their capital level and supervisory condition. Federal
regulations also limit any repurchase of the stock for the Bank of
its holding company for three years after reorganization except for
repurchases pursuant to an open-market stock repurchase program with
certain regulatory criteria and approval of the FDIC.
Employee Stock Ownership Plan - In connection with the
Reorganization, Westfield Financial, Inc. established an Employee
Stock Ownership Plan ("ESOP") for eligible employees. Employees
employed with Mutual Holding Company, Westfield Financial, Inc. or
the Bank who have completed one year of service and have attained age
21 are eligible to participate.
To fund the purchase of 8% of the shares of common stock issued in
the reorganization, the ESOP Trust will borrow funds from the Mutual
Holding Company or the Company. The loan to the ESOP Trust will be
repaid principally from the Bank's contributions to the ESOP Trust
over a period of 30 years and the collateral for the loan will be the
common stock purchased by the ESOP Trust.
Shares purchased by the ESOP will be held by a trustee for
allocations among participants as the loan is repaid.
F-6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation - Westfield Financial,
Inc. (the "Company") is a Massachusetts security corporation. The
Company has a state chartered stock savings bank subsidiary called
Westfield Bank (the "Bank"). The Bank's deposits are insured to the
limits specified by the Federal Deposit Insurance Corporation
("FDIC") and the Deposit Insurance Fund ("DIF"), a corporation formed
by the Massachusetts' legislature. The Bank operates 10 branches in
Western Massachusetts. The Bank's primary source of revenue is earned
by providing loans to small and middle-market businesses and to
residential property homeowners.
The Bank formed Westfield Elm Associates, Inc., ("Westfield Elm"), a
wholly owned subsidiary. In addition, Westfield Elm formed two
subsidiaries, Elm Street Real Estate Investments Inc., (the "REIT")
and Elm Street Business Trust (the "MBT"). The REIT is 99.9% owned by
Westfield Elm with the remaining .1% owned by other shareholders. The
MBT was 100% wholly owned by Westfield Elm. During 2000, the Company
eliminated Westfield Elm and the MBT to streamline the overall bank
structure.
Westfield Securities Corp., a Massachusetts chartered security
corporation, was formed in 2001 by the Company for the primary
purpose of holding qualified investment securities.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, the Bank, Westfield Security
Corp., and the REIT. All material intercompany balances and
transactions have been eliminated in consolidation. Certain amounts
in the prior year financial statements have been reclassified to
conform to the current year presentation.
Estimates - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of income and expenses for each. Actual results could differ
from those estimates. Estimates that are particularly susceptible to
significant change in the near-term relate to the determination of
the fair value of financial instruments and the allowance for loan
losses.
Cash and Cash Equivalents - The Company defines cash on hand, cash
due from banks, federal funds sold and interest bearing deposits
having an original maturity of 90 days or less as cash and cash
equivalents. Cash and due from banks at December 31, 2001 and 2000 is
partially restricted by approximately $3,352,000, and $2,176,000
respectively, for Federal Reserve Bank of Boston cash reserve
requirements.
Securities and Mortgage Backed Securities - Securities, including
mortgage backed securities, which management has the positive intent
and ability to hold until maturity are classified as held to maturity
and are carried at amortized cost. Securities, including mortgage
backed securities, which have been identified as assets for which
there is not a positive intent to hold to maturity are classified as
available for sale and are carried at fair value with unrealized
gains and losses, net of income taxes, reported as a separate
component of equity. The Company does not acquire securities and
mortgage backed securities for purposes of engaging in trading
activities.
Realized gains and losses on sales of securities and mortgage backed
securities are computed using the specific identification method and
are included in noninterest income. Securities and mortgage backed
securities which have experienced an other than temporary decline in
value are written down to estimated fair value, establishing a new
cost basis with the amount of the write-down included in noninterest
expense as a realized loss. The amortization of premiums and
accretion of discounts is determined by using the level yield method
to the earlier of the call or maturity date.
F-7
Loans - Loans are recorded at the principal amount outstanding.
Interest on loans is calculated using the effective yield method on
daily balances of the principal amount outstanding and is credited to
income on the accrual basis to the extent it is deemed collectible.
The Company's general policy is to discontinue the accrual of
interest when principal or interest payments are delinquent 90 days
or more, or earlier if the loan is considered impaired. Any unpaid
amounts previously accrued on these loans are reversed from income.
Subsequent cash receipts are applied to the outstanding principal
balance or to interest income if, in the judgment of management,
collection of the principal balance is not in question. Loans are
returned to accrual status when they become current as to both
principal and interest and when subsequent performance reduces the
concern as to the collectibility of principal and interest. Loan fees
and certain direct loan origination costs are deferred, and the net
fee or cost is recognized as an adjustment to interest income over
the estimated average lives of the related loans. Compensation to an
auto dealer is normally based upon a spread that a dealer adds on the
loan base rate set by the Company. The compensation is paid to an
automobile dealer shortly after the loan is originated. The Company
records the amount as a deferred cost that is amortized over the life
of the loans in relation to the interest paid by the customer.
Allowance for Loan Losses - The allowance for loan losses is
established through provisions for loan losses charged to expense.
Loans are charged off against the allowance when management believes
that the collectibility of the principal is unlikely. Recoveries of
amounts previously charged-off are credited to the allowance.
The Bank maintains an allowance for loan losses to absorb losses
inherent in the loan portfolio based on ongoing quarterly assessments
of the estimated losses. The Bank's methodology for assessing the
appropriateness of the allowance consists of two key components,
which are a specific allowance for identified problem loans and a
formula allowance for the remainder of the portfolio. The specific
allowance incorporates the results of measuring impaired loans as
provided in SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures." These accounting
standards prescribe the measurement methods, income recognition and
disclosures related to impaired loans. The formula allowance is
calculated by applying loss factors to outstanding loans by type,
excluding loans for which a specific allowance has been determined.
Loss factors are based on historical loss experience.
A loan is recognized as impaired when it is probable that principal
and/or interest are not collectible in accordance with the loan's
contractual terms. A loan is not deemed to be impaired if there is a
short delay in receipt of payment or if, during a longer period of
delay, the Company expects to collect all amounts due including
interest accrued at the contractual rate during the period of delay.
Measurement of impairment can be based on present value of expected
future cash flows discounted at the loan's effective interest rate,
the loan's observable market price or the fair value of the
collateral, if the loan is collateral dependent. This evaluation is
inherently subjective as it requires material estimates that may be
susceptible to significant change. If the fair value of the impaired
loan is less than the related recorded amount, a specific valuation
allowance is established within the allowance for loan losses or a
writedown is charged against the allowance for loan losses if the
impairment is considered to be permanent. Measurement of impairment
does not apply to large groups of smaller balance homogeneous loans
that are collectively evaluated for impairment such as the Company's
portfolios of home equity loans, real estate mortgages, installment
and other loans.
The appropriateness of the allowance is also reviewed by management
based upon its evaluation of then-existing economic and business
conditions affecting the key lending areas of the Company and other
conditions, such as new loan products, credit quality trends
(including trends in nonperforming loans expected to result from
existing conditions), collateral values, loan volumes and
concentrations, specific industry conditions within portfolio
segments that existed as of the balance sheet date and the impact
that such conditions were believed to have had on the collectibility
of the loan portfolio. There may be other factors that warrant the
Company's consideration in maintaining the allowance at a level
F-8
sufficient to cover probable losses. Although management believes it
has established and maintained the allowance for loan losses at
adequate levels, future adjustments may be necessary if economic,
real estate and other conditions differ substantially from the
current operating environment.
In addition, various regulatory agencies, as an integral part of
their examination process, periodically review our loan and
foreclosed real estate portfolios and the related allowance for loan
losses and valuation allowance for foreclosed real estate. These
agencies, including the FDIC and the Massachusetts Division of Banks,
may require adjustment to the allowance for loan losses based on
their judgments of information available to them at the time of their
examination, thereby adversely affecting results of operations.
Management believes that the allowance for loan losses accurately
reflects estimated credit losses for specifically identified loans,
as well as probable credit losses inherent in the remainder of the
portfolio as of the end of the periods presented.
Transfers and Servicing of Financial Assets - The Company follows the
provisions of SFAS No. 140 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS No. 140
provides consistent application of a financial-components approach
that recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when
control has been surrendered and derecognizes liabilities when
extinguished.
Premises and Equipment - Land is carried at cost. Buildings and
equipment are stated at cost, less accumulated depreciation, computed
on either the straight-line or accelerated methods over the estimated
useful lives of the assets, or lease term, if shorter, as follows:
Years
-----
<s> <c>
Buildings 39
Leasehold Improvements 20
Furniture and Equipment 3-7
It is general practice to charge the cost of maintenance and repairs
to expense when incurred; major expenditures for betterments are
capitalized and depreciated.
Other Real Estate Owned - Other real estate owned represents property
acquired through foreclosure or deeded to the Company in lieu of
foreclosure. Other real estate owned is recorded at the lower of the
carrying value of the related loan, or the estimated fair value of
the real estate acquired, net of estimated selling costs. Initial
write-downs are charged to the allowance for loan losses at the time
the loan is transferred to other real estate owned. Subsequent
valuations are periodically performed by management and the carrying
value is adjusted by a charge to expense to reflect any subsequent
declines in the estimated fair value. Operating costs associated with
other real estate owned are expensed as incurred.
Retirement Plans and Employee Benefits - The Company provides a
defined benefit pension plan for eligible employees through
membership in the Savings Banks Employees Retirement Association
("SBERA"). The Company's policy is to fund pension cost as accrued.
Employees are also eligible to participate in a 401(k) plan through
SBERA. Beginning in 2000, the Company began making matching
contributions to this plan at 50% of up to 6% of the employees'
eligible compensation.
The Company currently offers postretirement life insurance benefits
to retired employees. Such postretirement benefits represent a form
of deferred compensation which requires that the cost and obligations
of such benefits are recognized in the period in which services are
rendered.
Income Taxes - The Company uses the asset and liability method for
income tax accounting, whereby, deferred tax assets and liabilities
are recognized for the future tax consequences attributable
F-9
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Earnings Per Share - The Common Stock of the Company commenced
trading on December 28, 2001. As such, earnings per share data for
all reported periods is meaningless.
Derivative Financial Instruments - In 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities"
as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities- Deferral of Effective Date of FASB Statement
No. 133", which establishes accounting and reporting standards for
derivatives, derivative instruments embedded in other contracts and
for hedging activities. In 2000, the FASB issued SFAS No. 138,
Accounting for Certain Derivative Instruments and Hedging Activities,
which establishes accounting and reporting standards for certain
derivatives, derivative instruments embedded in other contracts and
for certain hedging activities. These statements became effective for
the Company on January 1, 2001. The adoption of these statements had
no effect on the Company's consolidated financial statements because
no derivative financial instrument or embedded derivative financial
instrument requiring application of this statement were outstanding
at January 1, 2001 or at any time during the year ended December 31,
2001.
New Accounting Standards - In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standard ("SFAS") No. 141, "Business Combinations." SFAS No. 141
requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests
method.
In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets", which became effective January 1, 2002. SFAS No.
142 requires, among other things, the discontinuance of goodwill
amortization, the reclassification of certain existing recognized
intangibles as goodwill, the reassessment of the useful lives of
existing recognized intangibles and the identification of reporting
units for purposes of assessing potential future impairments of
goodwill. SFAS 142 also requires a transitional goodwill impairment
test six months from the date of adoption.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", which superceded SFAS
No. 121 and portions of APB Opinion No. 30. This statement addresses
the recognition of an impairment loss for long-lived assets to be
held and used, or disposed of by sale or otherwise. This statement is
effective for financial statements issued for fiscal years beginning
December 15, 2001 and interim periods within those fiscal years.
The adoption of these standards did not have any effect on the
Company's consolidated financial statements.
F-10
3. SECURITIES
Securities at December 31, 2001 are summarized as follows:
December 31, 2001
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
<c> <c> <c> <c> <c>
Held to maturity:
Federal agency obligations $ 30,002 $ 167 $ 26 $ 30,143
Corporate debt securities 15,612 400 - 16,012
-------------------------------------------------
Total held to maturity 45,614 567 26 46,155
-------------------------------------------------
Available for sale:
Corporate debt securities 31,475 797 - 32,272
Equity securities 14,320 1,228 873 14,675
Federal agency obligations 26,893 366 22 27,237
-------------------------------------------------
Total available for sale 72,688 2,391 895 74,184
-------------------------------------------------
Total Securities $118,302 $2,958 $ 921 $120,339
=================================================
Securities at December 31, 2000 are summarized as follows:
December 31, 2000
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
<c> <c> <c> <c> <c>
Held to maturity:
Federal agency obligations $ 23,890 $ 162 $ 20 $ 24,032
Corporate debt securities 15,409 148 9 15,548
Other securities 162 - 3 159
-------------------------------------------------
Total held to maturity 39,461 310 32 39,739
-------------------------------------------------
Available for sale:
Corporate debt securities 40,693 232 614 40,311
Equity securities 8,063 2,095 414 9,744
Federal agency obligations 19,298 320 72 19,546
Other securities 6,088 22 2 6,108
-------------------------------------------------
Total available for sale 74,142 2,669 1,102 75,709
-------------------------------------------------
Total Securities $113,603 $2,979 $1,134 $115,448
=================================================
The amortized cost and fair value of debt securities at December 31,
2001, by maturity, are shown below. Actual maturities may differ from
contractual maturities because certain issues have the right to call
or repay obligations.
F-11
December 31, 2001
-----------------------
Amortized Estimated
Cost Fair Value
--------- ----------
(In Thousands)
<s> <c> <c>
Held to maturity:
Due in one year or less $11,013 $11,134
Due after one year through five years 34,488 34,906
Due after five years through ten years 113 115
--------------------
Total held to maturity $45,614 $46,155
====================
Available for sale:
Due in one year or less $11,328 $11,520
Due after one year through five years 38,600 39,496
Due after five years through ten years 1,182 1,184
Due after ten years 7,258 7,309
--------------------
Total available for sale $58,368 $59,509
====================
Gross gains of $952,674, $1,878,716 and $1,065,279 and gross losses
$477,334, $328,395, and $457,110 were recorded on securities during
the years ended December 31, 2001, 2000, and 1999, respectively.
During 2001 and 1999, the Company realized losses of $315,000 and
$83,000, respectively, for other than temporary impairments in value.
Securities with a par value of $12,000,000 and $13,000,000 were
pledged as collateral to the Federal Reserve Bank of Boston at
December 31, 2001 and 2000, respectively.
F-12
4. MORTGAGE BACKED SECURITIES
Mortgage backed securities at December 31, 2001 are summarized as
follows:
December 31, 2001
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
<c> <c> <c> <c> <c>
Held to maturity:
Fannie Mae $ 23,927 $ 165 $ 89 $ 24,003
Freddie Mac 31,470 399 126 31,743
Ginnie Mae 7,215 58 49 7,224
Collateralized Mortgage Obligations 18,395 103 101 18,397
-------------------------------------------------
Total held to maturity 81,007 725 365 81,367
-------------------------------------------------
Available for sale:
Fannie Mae 35,822 1,029 29 36,822
Freddie Mac 18,490 117 54 18,553
Ginnie Mae 22,018 113 78 22,053
Collateralized Mortgage Obligations 9,578 155 11 9,722
-------------------------------------------------
Total available for sale 85,908 1,414 172 87,150
-------------------------------------------------
Total Mortgage Backed Securities $166,915 $2,139 $537 $168,517
=================================================
Mortgage backed securities at December 31, 2000 are summarized as follows:
December 31, 2000
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
<c> <c> <c> <c> <c>
Held to maturity:
Fannie Mae $ 4,555 $123 $ 27 $ 4,651
Freddie Mac 957 1 8 950
Ginnie Mae 1,294 2 33 1,263
------------------------------------------------
Total held to maturity 6,806 126 68 6,864
------------------------------------------------
Available for sale:
Fannie Mae 29,174 80 321 28,933
Freddie Mac 4,728 45 3 4,770
Ginnie Mae 8,610 65 31 8,644
Collateralized Mortgage Obligations 10,016 217 - 10,233
------------------------------------------------
Total available for sale 52,528 407 355 52,580
------------------------------------------------
Total Mortgage Backed Securities $59,334 $533 $423 $59,444
================================================
Collateralized Mortgage Obligations ("CMOs") - CMOs include traunches
of AAA investment grade and consist of high quality mortgage
obligations.
Gross gains of $833,147, $15,781 and $11,485 and gross losses of
$162,697, $31,365 and $21,352 were recorded on mortgage backed
securities during the years ended December 31, 2001, 2000 and 1999,
respectively.
F-13
5. LOANS
Loans consisted of the following amounts as of:
December 31,
--------------------
2001 2000
---- ----
(In Thousands)
<s> <c> <c>
Residential real estate $212,751 $264,162
Commercial and industrial 47,012 37,510
Commercial real estate 99,425 92,826
Consumer 58,084 73,339
--------------------
417,272 467,837
Unearned premiums and deferred
loan fees and costs, net 197 128
Allowance for loan losses (3,923) (3,434)
--------------------
$413,546 $464,531
====================
The following tables summarize information regarding impaired loans:
Years Ended
December 31,
----------------------
2001 2000
---- ----
(Dollars In Thousands)
<s> <c> <c>
Recorded investment in impaired loans, period end $1,944 $1,440
Allowance for impaired loans 70 77
Years Ended
December 31,
-------------------------
2001 2000 1999
---- ---- ----
(Dollars In Thousands)
<s> <c> <c> <c>
Average recorded investment
in impaired loans 1,612 1,394 1,408
Income recorded during the
period for impaired loans 163 97 168
Income recorded on cash basis during
the period for impaired loans 155 92 136
There were no restructured loans at December 31, 2001 and 2000.
F-14
Nonaccrual loans at December 31, 2001 and 2000 and related interest
income are summarized as follows:
Years Ended
December 31,
--------------------------
2001 2000 1999
---- ---- ----
(In Thousands)
<s> <c> <c> <c>
Amount $2,684 $2,308 $2,751
Interest income that would
have been recorded under the
original contract terms 263 191 131
Mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid balances of
these loans totaled $97,616,627 and $50,683,129 at, December 31, 2001
and 2000, respectively. Service fee income of $119,605, $119,927, and
$134,762 was recorded for the years ended December 31, 2001, 2000,
and 1999, respectively.
Loan Securitization - On June 1, 2001, the Company securitized
residential real estate mortgages with a recorded value of
approximately $60 million. The Company retained servicing
responsibilities and all beneficial interests in the resulting
mortgage backed securities. The Company has not committed to sell any
of the retained mortgage backed securities before or during the
securitization process. The resulting mortgage backed securities in
the amount of $19.7 million are included in Mortgage Backed
Securities - Available for Sale as of December 31, 2001 in accordance
with the provisions of SFAS 115.
The Company's servicing assets are recorded at fair value at the time
the asset is acquired. The fair value is based upon the net present
value of future cash flows of the net servicing revenue. Assumptions
used in determining fair value include service fee revenue, float
revenue, escrow revenue, servicing expense, and estimated life of the
underlying loans. The servicing asset is amortized in proportion to
the estimated net servicing revenue of the loans. The carrying value
of the servicing assets as of December 31, 2001 was $607,717.
The fair value of the asset is recalculated quarterly to determine
possible impairment. The fair value of the servicing assets as of
December 31, 2001 was $675,185.
6. ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses is as
follows:
Years Ended December 31,
------------------------------
2001 2000 1999
---- ---- ----
(In Thousands)
<s> <c> <c> <c>
Balance, beginning of year $ 3,434 $ 3,118 $ 2,632
Provision 1,630 1,089 843
Loans charged off (1,843) (1,059) (545)
Recoveries 702 286 188
------------------------------
Balance, end of year $ 3,923 $ 3,434 $ 3,118
==============================
F-15
7. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
-------------------
2001 2000
---- ----
(In Thousands)
<s> <c> <c>
Land $ 2,288 $ 1,835
Buildings 10,189 10,399
Leasehold improvements 735 742
Furniture and equipment 5,027 4,431
-------------------
Total 18,239 17,407
Accumulated depreciation and amortization (4,658) (5,663)
-------------------
Premises and equipment, net $13,581 $11,744
===================
8. OTHER REAL ESTATE OWNED
Other real estate owned of $239,833 and $55,132 was included in Other
Assets at December, 31, 2001 and December 31, 2000. No other real
estate owned existed at December 31, 1999. During the years ended
December 31, 2001, 2000, and 1999, the Company transferred loans, at
fair value less costs to dispose, to other real estate owned of
$270,051, $235,170 and $0. No loans to facilitate the sale of other
real estate owned were made during the years ended December 31, 2001,
2000, and 1999.
9. DEPOSITS
Deposit accounts by type and weighted average rates are summarized as
follows:
December 31, December 31,
2001 Rate 2000 Rate
------------ ---- ------------ ----
(Dollars In Thousands)
<s> <c> <c> <c> <c>
Demand and Now:
Now accounts $ 38,758 1.69% $ 34,519 2.37%
Demand accounts 48,247 - 38,500 -
Savings:
Regular accounts 42,673 1.05 42,348 1.07
Money market accounts 127,085 2.02 113,787 3.74
Time certificates of deposit 380,346 4.56 372,742 5.79
-------- --------
Total deposits $637,109 $601,896
======== ========
F-16
Time deposits of $100,000 or more totaled approximately $78,651,000
and $70,832,000 at December 31, 2001 and 2000, respectively. Interest
expense on such deposits totaled $3,996,419, $3,481,955 and
$2,248,906 for the years ended December 31, 2001, 2000 and 1999
respectively. Cash paid for interest was:
December 31,
-----------------------------
2001 2000 1999
---- ---- ----
(In Thousands)
<s> <c> <c> <c>
Deposits $24,698 $24,122 $21,053
Customer Repurchase Agreements 246 320 41
Federal Home Loan Advances 26 128 50
-----------------------------
Total $24,970 $24,750 $21,144
=============================
At December 31, 2001, the scheduled maturities of time certificates
of deposits are as follows:
Amount Rate
------ ----
(Dollars in Thousands)
<s> <c> <c>
Within 1 year $282,245 4.44%
Over 1 year to 3 years 95,357 4.93
Over 3 years to 5 years 2,744 4.36
--------
Total certificates of deposits $380,346 4.56
========
10. CUSTOMER REPURCHASE AGREEMENTS
The following table summarizes information regarding repurchase
agreements:
Years Ended
December 31,
----------------------
2001 2000
---- ----
(Dollars In Thousands)
<s> <c> <c>
Balance outstanding, end of year $ 6,061 $ 7,686
Maximum amount outstanding at any month end during period 8,222 8,440
Average amount outstanding during period 6,527 6,001
Weighted average interest rate 2.74% 5.34%
Book value of collateral pledged
end of period 11,000 12,017
Fair value of collateral pledged
end of period 11,202 12,006
11. LINE OF CREDIT
The Company has a line of credit with the Federal Reserve Bank of
Boston to be collateralized by marketable securities. Additionally,
the Company has an "Ideal Way" line of credit with the Federal Home
Loan Bank for $9,541,000 at December 31, 2001 and 2000. No amounts
were outstanding under these lines at December 31, 2001 and 2000.
F-17
12. RETIREMENT PLANS AND EMPLOYEE BENEFITS
Pension Plan - The Company provides basic and supplemental pension
benefits for eligible employees through the Savings Banks Employees
Retirement Association Pension Plan (the "Plan"). Employees must work
a minimum of 1,000 hours per year to be eligible for the Plan.
Eligible employees become vested in the Plan after five years of
service.
The following table provides information for the Plan at December 31:
2001 2000 1999
---- ---- ----
(Dollars in Thousands)
<s> <c> <c> <c>
Change in benefit obligation:
Benefit obligation, beginning of year $4,920 $4,673 $4,402
Service cost 378 364 342
Interest 381 362 297
Actuarial (gain) loss 880 (399) (282)
Benefits paid (297) (80) (86)
--------------------------
Benefit obligation, end of year $6,262 $4,920 $4,673
==========================
Change in plan assets:
Fair value of plan assets, beginning of year $5,520 $4,563 $3,573
Actual return (loss) on plan assets (563) 666 710
Employer contribution 18 371 366
Benefits paid (297) (80) (86)
--------------------------
Fair value of plan assets, end of year $4,678 $5,520 $4,563
==========================
Funded status (fair value of plan
assets less benefit obligation) $1,584 $ (600) $ 110
Unrecognized net actuarial gain 165 2,137 1,497
Transition liability 150 162 173
--------------------------
Accrued benefit cost $1,899 $1,699 $1,780
==========================
Net pension cost includes the following components for the years
ended December 31:
2001 2000 1999
---- ---- ----
(Dollars in Thousands)
<s> <c> <c> <c>
Service cost $ 378 $ 364 $ 342
Interest cost 381 362 297
Expected return on assets (444) (365) (286)
Actuarial loss (86) (59) (31)
Transition obligation (12) (12) (12)
-------------------------
Net periodic pension cost $217 $ 290 $ 310
========================
F-18
The following actuarial assumptions were used for the years ended
December 31:
2001 2000 1999
---- ---- ----
<s> <c> <c> <c>
Weighted-average assumptions:
Discount rate 7.75% 7.75% 7.75%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 5.50% 5.50% 5.50%
Postretirement Benefits - The Company provides postretirement life
insurance benefits to employees based on the employee's salary at
time of retirement. The accrual of postretirement benefits other than
pension expense is made during the years an employee provides
service. The following sets forth the funded status:
December 31,
----------------------
2001 2000
---- ----
(Dollars in Thousands)
<s> <c> <c>
Benefits obligation $ 425 $ 440
Fair value of plan assets - -
------------------
Funded status $(425) $(440)
==================
Accrued benefit costs $(327) $(270)
==================
Weighted-average assumptions:
Discount rate 7.0% 7.0%
Expected return on plan assets 8.0% 8.0%
Rate of compensation increase 6.0% 6.0%
Benefit cost $ 48 $ 49
Benefit paid 58 38
Supplemental Retirement Benefits - The Company provides supplemental
retirement benefits to certain key officers. At December 31, 2001 and
2000, the Company had accrued $1,747,695 and $1,596,731,
respectively, relating to these benefits. Amounts charged to expense
were $180,000, $190,000 and $155,000 for the years ended December 31,
2001, 2000 and 1999, respectively.
401(k) - Employees are eligible to participate in a 401(k) plan
through SBERA. During 2000, the Company began making a matching
contribution of 50% with respect to the first 6% of each
participant's annual earnings contributed to the plan. The Company's
contribution to the plan were $50,494 and $102,933, for the years
ended December 31, 2001 and 2000.
13. REGULATORY CAPITAL
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect
on the Company's and the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the
F-19
regulators about components, risk weightings, and other factors.
Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the following table) of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as
defined) and of Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of December 31, 2001 and 2000, that
the Company and the Bank met all capital adequacy requirements to
which they are subject.
As of December 31, 2001, the most recent notification from The
Federal Deposit Insurance Corporation categorized the Bank as "well
capitalized" under the regulatory framework for prompt corrective
action. To be categorized as "well capitalized" the Bank must
maintain minimum total risk-based, Tier I risk based and Tier I
leverage ratios as set forth in the following. There are no
conditions or events since that notification that management believes
have changed the Bank's category. The Company's and the Bank's actual
capital ratios as of December 31, 2001 and 2000 are also presented in
the table.
Minimum
To Be Well
Minimum Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
------------------ ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ----
(Dollars in Thousands)
<s> <c> <c> <c> <c> <c> <c>
December 31, 2001:
Total Capital (to Risk Weighted Assets):
Consolidated $133,838 28.98% $36,946 8.00% N/A -
Bank 75,478 17.14 35,229 8.00 $44,036 10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated 129,742 28.09 18,475 4.00 N/A -
Bank 71,382 16.21 17,614 4.00 26,421 6.00
Tier I Capital (to Average Assets):
Consolidated 129,742 17.27 30,050 4.00 N/A -
Bank 71,382 9.96 28,667 4.00 35,834 5.00
Minimum
To Be Well
Minimum Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
------------------ ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ----
(Dollars in Thousands)
<s> <c> <c> <c> <c> <c> <c>
December 31, 2000:
Total Capital (to Risk Weighted Assets):
Consolidated $ 81,066 17.24% $37,618 8.00% N/A -
Bank 47,873 10.78 35,527 8.00 $44,409 10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated 76,768 16.33 18,804 4.00 N/A -
Bank 43,575 9.81 17,768 4.00 26,651 6.00
Tier I Capital (to Average Assets):
Consolidated 76,768 11.51 26,679 4.00 N/A -
Bank 43,575 6.72 25,937 4.00 32,422 5.00
F-20
14. INCOME TAXES
Income taxes (benefit) consist of the following:
Years Ended
December 31,
----------------------------
2001 2000 1999
---- ---- ----
(In Thousands)
<s> <c> <c> <c>
Federal:
Current $ (352) $3,246 $3,247
Deferred 2,857 (61) (349)
----------------------------
Total 2,505 3,185 2,898
----------------------------
State:
Current 7 - -
Deferred - - -
----------------------------
Total 7 - -
----------------------------
Total:
Current (345) 3,246 3,247
Deferred 2,857 (61) (349)
----------------------------
Total $2,512 $3,185 $2,898
============================
Cash paid for income taxes for the years ended December 31, 2001,
2000 and 1999 was $ 200,000, $3,333,000 and $3,041,000, respectively.
The reconciliation between the provision for income taxes and the
provision for income taxes at the federal statutory rate is as
follows:
December 31,
----------------------------------
2001 2000 1999
---- ---- ----
(In Thousands, except percentages)
<s> <c> <c> <c>
Income before income taxes $7,529 $9,265 $8,425
Federal statutory rate 34% 34% 34%
Provision for income taxes at
Federal statutory rate $2,560 $3,150 $2,865
Officers life insurance (11) (7) (7)
Tax exempt interest 9 (10) (2)
Dividends received deduction (30) (18) -
Other (16) 70 42
------------------------------
Total $2,512 $3,185 $2,898
==============================
F-21
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below:
December 31,
-------------------
2001 2000
---- ----
(In Thousands)
<s> <c> <c>
Deferred tax assets:
Accrued pension $ 1,257 $ 1,137
Allowance for loan losses 1,290 1,126
Nonaccrual interest 160 203
Other 239 81
-------------------
Deferred tax assets 2,946 2,547
-------------------
Deferred tax liabilities:
Depreciation expense (192) (116)
Loan origination fees (198) (234)
Unrealized gain on available for sale securities (959) (654)
REIT Dividend (2,976) -
Other (456) (217)
-------------------
Deferred tax liabilities (4,781) (1,221)
-------------------
Net deferred tax (liability) asset $(1,835) $ 1,326
===================
Retained earnings includes accumulated bad debt deductions for tax
purposes of approximately $5,832,000 on which no federal income tax
has been paid. If this amount, or any portion thereof, is used for
purposes other than to absorb the losses for which it was
established, the amount so used must be included in gross income for
federal income tax purposes for the fiscal year in which used.
Because management does not anticipate that this will occur, no such
income taxes have been provided.
15. TRANSACTIONS WITH DIRECTORS AND TRUSTEES
The Company has had, and expects to have in the future, loans with
its directors, trustees, and executive officers. Such loans, in the
opinion of management do not include more than the normal risk of
collectibility or other unfavorable features. Following is a summary
of activity for such loans:
Years Ended
December 31,
-------------------------------
2001 2000 1999
---- ---- ----
(In Thousands)
<c> <c> <c> <c>
Balance, beginning of year $ 3,647 $ 3,589 $ 4,411
New loans granted 283 414 642
Repayments of principal (2,360) (356) (1,464)
-------------------------------
Balance, end of year $ 1,570 $ 3,647 $ 3,589
===============================
F-22
16. COMMITMENTS AND CONTINGENCIES
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as standby letters of credit and
commitments to extend credit with off-balance-sheet risk that are not
reflected in the consolidated financial statements. Financial
instruments with off-balance-sheet risk involve elements of credit,
interest rate, liquidity and market risk.
Management does not anticipate any significant losses as a result of
these transactions. The following summarizes these financial
instruments and other commitments and contingent liabilities at their
contract amounts:
December 31,
------------------
2001 2000
---- ----
(In Thousands)
<s> <c> <c>
Commitments to extend credit:
Unused lines of credit $57,773 $39,611
Mortgage commitments 1,315 22,654
Existing loan agreements 1,696 7,658
Standby letters of credit 1,073 1,457
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some
commitments expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but may
include accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties.
Standby letters of credit are written conditional commitments issued
by the Bank to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and
private borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in
extending loan facilities to customers.
In the ordinary course of business, the Company is party to various
legal proceedings, none of which, in the opinion of management, will
have a material effect on the Company's consolidated financial
position or results of operations.
The Company leases facilities and certain equipment under cancelable
and noncancelable leases expiring in various years through the year
2007. Certain of the leases provide for renewal periods for up to
fifteen years at the discretion of the Company. Rent expense under
operating leases was $171,246, $165,620, and $135,447, for the years
ended December 31, 2001, 2000, and 1999, respectively.
F-23
Aggregate future minimum rental payments under the terms of the
operating leases at December 31, 2001, are as follows:
(In Thousands)
<c> <c>
2002 $169
2003 149
2004 84
2005 89
2006 89
Thereafter 7
----
$587
====
17. CONCENTRATIONS OF CREDIT RISK
Most of the Company's loans consist of residential and commercial
real estate loans located in Western Massachusetts. As of December
31, 2001 and 2000, the Company's residential and commercial related
real estate loans represented 75% and 76% of total loans,
respectively. The Company's policy for collateral requires that the
amount of the loan may not exceed 95% and 80% of the appraised value
of the property for residential and commercial real estate,
respectively; at the date the loan is granted. For residential loans,
in cases where the loan exceeds the percentage, private mortgage
insurance is typically obtained for that portion of the loan in
excess of 80% of the appraised value of the property.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
Methods and assumptions for valuing the Company's financial
instruments are set forth below for financial instruments that have
fair values different than their carrying values. Estimated fair
values are calculated based on the value without regard to any
premium or discount that may result from concentrations of ownership
of a financial instrument, possible tax ramifications or estimated
transaction costs.
Cash and Cash Equivalents and Accrued Interest Receivable and Accrued
Interest Payable - The carrying amounts of these items are considered
to be a reasonable estimate of fair value due to their short-term
nature.
Securities and Mortgage Backed Securities - The estimated fair values
for securities and mortgage backed securities, except certain state
and municipal securities, are based on quoted market prices or dealer
quotations. The estimated fair value of certain state and municipal
securities, not readily available through market sources other than
dealer quotations, are based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments
and the instruments being valued.
Federal Home Loan Bank and Other Stock - These investments are
carried at cost which approximates fair value.
Loans - Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by type, net
of the applicable portion of the allowance for loan losses, such as
commercial and industrial, commercial real estate, residential
mortgage, and consumer. Each loan category is further segmented into
fixed and adjustable rate interest terms and by performing and
nonperforming categories.
F-24
The fair value of performing loans, except residential mortgage
loans, is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect
the credit and interest rate risk inherent in the loan. The estimate
of maturity is based on the Company's historical experience with
repayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions.
For performing residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates
using discount rates based on secondary market sources adjusted to
reflect differences in servicing and credit costs.
Estimated fair value for impaired loans is based on recent external
appraisals if the loan is collateral dependent. Assumptions regarding
credit risk cash flows and discount rates are judgmentally determined
using available market information and specific borrower information.
Management has made estimates of fair value discount rates that it
believes to be reasonable.
Deposits - The estimated fair value of deposits with no stated
maturity, such as noninterest-bearing demands deposits, savings and
NOW accounts, and money market and checking accounts, is equal to the
amount payable on demand. The estimated fair value of certificates of
deposit is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
Customer Repurchase Agreements and Federal Home Loan Bank Advances -
The fair value of these agreements and advances is estimated based on
the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered.
Commitments to Extend Credit - The stated value of commitments to
extend credit approximates fair value as the current interest rates
for similar commitments do not differ significantly. For fixed-rate
loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. Such
differences are not considered significant.
The estimated fair values of the Company's financial instruments at
December 31 are as follows:
2001 2000
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
(In Thousands)
<s> <c> <c> <c> <c>
ASSETS:
Cash and cash equivalents $ 57,035 $ 57,035 $ 32,729 $ 32,729
Securities:
Available for sale 74,184 74,184 75,709 75,709
Held to maturity 45,614 46,155 39,461 39,739
Mortgage backed securities:
Available for sale 87,150 87,150 52,580 52,580
Held to maturity 81,007 81,367 6,806 6,864
Federal Home Loan Bank
and other stock 3,634 3,634 3,446 3,446
Loans - net 413,546 419,570 464,531 465,435
Accrued interest and dividends 4,201 4,201 4,172 4,172
LIABILITIES:
Deposits 637,109 641,409 601,896 604,523
Customer repurchase agreements 6,061 6,061 7,686 7,686
Accrued interest payable 28 28 59 59
F-25
Limitations - Fair value estimates are made at a specific point in
time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. Where
quoted market prices are not available, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment.
Changes in assumptions could significantly affect the estimates.
19. SEGMENT INFORMATION
The Company has one reportable segment, "Community Banking." All of
the Company's activities are interrelated, and each activity is
dependent and assessed based on how each of the activities of the
Company supports the others. For example, commercial lending is
dependent upon the ability of the Bank to fund itself with retail
deposits and other borrowings and to manage interest rate and credit
risk. This situation is also similar for consumer and residential
mortgage lending. Accordingly, all significant operating decisions
are based upon analysis of the Company as one operating segment or
unit.
The Company operates only in the U.S. domestic market, primarily in
Western Massachusetts. For the years ended December 31, 2001, 2000
and 1999, there is no customer that accounted for more than 10% of
the Company's revenue.
20. CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The balance sheets of the Company are as follows:
December 31,
2001
------------
(In Thousands)
<s> <c>
ASSETS:
Investment in subsidiary 131,317
TOTAL ASSETS $131,317
========
LIABILITIES AND EQUITY:
Equity 131,317
--------
TOTAL LIABILITIES AND EQUITY $131,317
========
F-26
The statements of income for the Company are as follows:
Years Ended
December 31,
------------
2001
----
(In Thousands)
<s> <c>
UNDISTRIBUTED INCOME
OF SUBSIDIARIES 5,017
------
NET INCOME $5,017
======
The statements of cash flows of the Company are as follows:
Years Ended
December 31,
------------
2001
----
(In Thousands)
<s> <c>
OPERATING ACTIVITIES:
Net income $ 5,017
Equity in undistributed earnings of subsidary (5,017)
-------
Net cash provided by operating activities -
-------
NET INCREASE (DECREASE) IN CASH -
CASH BEGINNING OF YEAR -
-------
CASH END OF YEAR -
=======
F-27
21. OTHER NONINTEREST EXPENSE
Indirect auto lending processing charges, as a component of other
noninterest expense, exceed 1% of the aggregate of total interest
income and noninterest income, and are not shown separately on the
consolidated statements of income. Indirect auto lending processing
charges of approximately $719,000, $746,000 and $1,005,000 were recorded
for the years ended December 31, 2001, 2000 and 1999, respectively.
22. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
2001
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In Thousands)
<s> <c> <c> <c> <c>
Interest and dividend income $12,260 $12,016 $11,697 $11,569
Interest expense 6,842 6,582 5,989 5,588
----------------------------------------
Net interest and dividend income 5,418 5,434 5,708 5,981
----------------------------------------
Provision for loan losses 328 272 530 500
Noninterest income 385 455 806 870
Noninterest expense 3,563 3,935 3,762 4,639
----------------------------------------
Income before income taxes 1,912 1,682 2,222 1,712
Income taxes 650 572 758 531
----------------------------------------
Net income $ 1,262 $ 1,110 $ 1,464 $ 1,181
========================================
2000
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In Thousands)
<s> <c> <c> <c> <c>
Interest and dividend income $11,014 $11,530 $11,922 $12,253
Interest expense 5,568 5,887 6,337 6,743
----------------------------------------
Net interest and dividend income 5,446 5,643 5,585 5,510
----------------------------------------
Provision for loan losses 525 225 150 189
Noninterest income 851 473 395 1,136
Noninterest expense 3,258 3,354 3,847 4,226
----------------------------------------
Income before income taxes 2,514 2,537 1,983 2,231
Income taxes 870 877 677 761
----------------------------------------
Net income $ 1,644 $ 1,660 $ 1,306 $ 1,470
========================================
F-28